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<SEC-DOCUMENT>0000043300-03-000020.txt : 20030509
<SEC-HEADER>0000043300-03-000020.hdr.sgml : 20030509
<ACCEPTANCE-DATETIME>20030508184002
ACCESSION NUMBER: 0000043300-03-000020
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20030222
FILED AS OF DATE: 20030509
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: 1934 Act
SEC FILE NUMBER: 001-04141
FILM NUMBER: 03688914
BUSINESS ADDRESS:
STREET 1: 2 PARAGON DR
CITY: MONTVALE
STATE: NJ
ZIP: 07645
BUSINESS PHONE: 2015739700
MAIL ADDRESS:
STREET 1: 2 PARAGON DRIVE
CITY: MONTVALE
STATE: NJ
ZIP: 07645
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>f10k.txt
<DESCRIPTION>FORM 10K FOR FY 2002 ENDED FEBRUARY 22, 2003
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 22, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
(Exact name of registrant as specified in its charter)
Maryland 13-1890974
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive
Montvale, New Jersey 07645
(Address of principal executive offices)
Registrant's telephone number, including area code: 201-573-9700
---------------------------
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock - $1 par value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
---------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant at May 7, 2003 was approximately $252,663,687. The number of
shares of common stock outstanding at May 7, 2003 was 38,515,806.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part I, Items 1 and 3, and Part II, Items
5, 6, 7, 7A, 8, 9, 14 and 15 are incorporated by reference from the Registrant's
Fiscal 2002 Annual Report to Stockholders.
<PAGE>
PART I
ITEM 1 - Business
General
- -------
The Great Atlantic & Pacific Tea Company, Inc. ("A&P", "we", "our",
"us" or "our Company") is engaged in the retail food business. We operated 695
stores averaging approximately 38,500 square feet per store as of February 22,
2003. In addition, we served as wholesaler to 65 franchise stores in Canada
averaging approximately 31,800 square feet per store as of February 22, 2003. On
the basis of reported sales for fiscal 2002, we believe that we are among North
America's largest retail food chains.
Operating under the trade names A&P(R), Super Fresh(R),
Sav-A-Center(R), Farmer Jack(R), Kohl's, Waldbaum's(TM), Super Foodmart, Ultra
Food & Drug, Dominion(R), Food Basics(TM), The Barn Markets and The Food
Emporium(TM), we sell groceries, meats, fresh produce and other items commonly
offered in supermarkets. In addition, many stores have bakery, delicatessen,
pharmacy, floral, fresh fish and cheese departments and on-site banking.
National, regional and local brands are sold as well as private label
merchandise. In support of our retail operations, we also operate one coffee
roasting plant in the United States. Through our Compass Foods Division, we
manufacture and distribute a line of whole bean coffees under the Eight
O'Clock(R), Bokar(R) and Royale(R) labels, for sale through our own stores as
well as other retail channels. We sell other private label products in our
stores under other brand names of our Company which include without limitation,
America's Choice(R), Master Choice(R), Health Pride(R), Savings Plus and The
Farm.
Building upon a broad base of A&P supermarkets, our Company has
historically expanded and diversified within the retail food business through
the acquisition of other supermarket chains and the development of several
alternative store types. We now operate our stores with merchandise, pricing and
identities tailored to appeal to different segments of the market, including
buyers seeking gourmet and ethnic foods, a wide variety of premium quality
private label goods and health and beauty aids along with the array of
traditional grocery products.
Modernization of Facilities
- ---------------------------
We are engaged in a continuing program of modernizing our operations
including retail stores, warehousing and distribution facilities, supply and
logistics and processes. In support of our modernizing program, on March 13,
2000, we announced our business process initiative, a plan to develop a state of
the art supply chain and business management infrastructure over four years.
This initiative was completed in fiscal 2002.
During fiscal 2002, we expended approximately $220 million for capital
projects, which included 31 new supermarkets and 38 major remodels or
enlargements. Our Company has planned capital expenditures of approximately $175
million in fiscal 2003. These expenditures relate primarily to opening 20 new
supermarkets and enlarging or remodeling 30 - 35 supermarkets. In addition, we
plan to continue with at least similar levels of capital expenditures in fiscal
2004 and several years thereafter.
Sources of Supply
- -----------------
Our Company obtains the merchandise sold in our stores from a variety
of suppliers located primarily in the United States and Canada. Our Company has
long-standing and satisfactory relationships with our suppliers.
We maintain 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 22, 2003, we had approximately 79,000 employees, of
which 68% were employed on a part-time basis. Approximately 89% of our employees
are covered by union contracts.
Competition
- -----------
The supermarket business is highly competitive throughout the marketing
areas served by our Company and is generally characterized by low profit margins
on sales with earnings primarily dependent upon rapid inventory turnover,
effective cost controls and the ability to achieve high sales volume. We compete
for sales and store locations with a number of national and regional chains, as
well as with many independent and cooperative stores and markets.
Segment Information
- -------------------
The segment information required is contained under the caption "Note
13 - Operating Segments" in the Fiscal 2002 Annual Report to Stockholders and
is herein incorporated by reference.
Foreign Operations
- ------------------
The information required is contained under the captions "Management's
Discussion and Analysis", "Note 5 - Wholesale Franchise Business", "Note 6 -
Indebtedness", "Note 9 - Income Taxes", "Note 10 - Retirement Plans and
Benefits", "Note 12 - Commitments and Contingencies" and "Note 13 - Operating
Segments" in the Fiscal 2002 Annual Report to Stockholders and is herein
incorporated by reference.
ITEM 2 - Properties
At February 22, 2003, we owned 117 properties consisting of the
following:
Stores, Not Including Stores in Owned Shopping Centers
------------------------------------------------------
Land and building owned 29
Building owned and land leased 17
Land owned and building leased 1
----
Total stores 47
Shopping Centers
----------------
Land and building owned 12
Building owned and land leased 7
----
Total shopping centers 19
Warehouses
----------
Land and building owned 7
Administrative and Other Properties
-----------------------------------
Land and building owned 12
Building owned and land leased 3
Property under development building owned
and land leased 4
Property under development land
and building owned 2
Property under development land only 1
Undeveloped land 22
----
Total other properties 44
----
Total Properties 117
====
At February 22, 2003, we operated 695 retail stores and serviced 65
franchised stores. These stores are geographically located as follows:
Company Stores:
--------------
New England States:
------------------
Connecticut 37
Massachusetts 15
New Hampshire 1
----
Total 53
Middle Atlantic States:
----------------------
District of Columbia 1
Delaware 9
Maryland 31
New Jersey 96
New York 141
Pennsylvania 23
----
Total 301
Midwestern States:
-----------------
Michigan 103
Ohio 6
Wisconsin 31
----
Total 140
Southern States:
---------------
Louisiana 20
Mississippi 4
North Carolina 1
----
Total 25
----
Total United States 519
Ontario, Canada 176
----
Total Stores 695
====
Franchised Stores:
Ontario, Canada 65
----
Total Franchised Stores 65
====
The total area of all of our operated retail stores is 26.8 million
square feet averaging approximately 38,500 square feet per store. Excluding
liquor and The Food Emporium(TM) stores, which are generally smaller in size,
the average store size is approximately 41,100 square feet. The total area of
all franchised stores is 2.1 million square feet averaging approximately 31,800
square feet per store. The 31 new stores opened in fiscal 2002 consisted of 30
supermarkets and 1 gas station in Canada. Excluding the gas station, the
supermarkets opened in fiscal 2002 had a range in size from 21,400 to 61,100
square feet, with an average size of approximately 44,800 square feet. The
stores built over the past several years and those planned for fiscal 2003 and
thereafter, generally range in size from 40,000 to 60,000 square feet. The
selling area of new stores is approximately 73% of the total square footage.
As of the end of fiscal 2002, we operated one coffee roasting plant in
the United States. In addition, we operated 13 warehouses to service our store
network. These warehouses are geographically located as follows:
Louisiana 1
Maryland 1
Michigan 2
New Jersey 1
New York 2
Pennsylvania 1
Wisconsin 1
----
Total United States 9
Ontario, Canada 4
----
Total Warehouses 13
====
The net book value of real estate pledged as collateral for all
mortgage loans amounted to $3.2 million as of February 22, 2003. The net book
value of real estate pledged as collateral for the Company's $425 million
Secured Revolving Credit Agreement amounted to $82.9 million as of February 22,
2003.
ITEM 3 - Legal Proceedings
The information required is contained under the caption "Note 12 -
Commitments and Contingencies" in the Fiscal 2002 Annual Report to Stockholders
and is herein incorporated by reference.
ITEM 4 - Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal 2002.
PART II
ITEM 5 - Market for the Registrant's Common Stock and Related
Security Holder Matters
The information required is contained under the captions "Summary of
Quarterly Results", "Five Year Summary of Selected Financial Data", and
"Stockholder Information" in the Fiscal 2002 Annual Report to Stockholders and
is herein incorporated by reference.
ITEM 6 - Selected Financial Data
The information required is contained under the caption "Five Year
Summary of Selected Financial Data" in the Fiscal 2002 Annual Report to
Stockholders and is herein incorporated by reference.
ITEM 7 - Management's Discussion and Analysis
The information required is contained under the caption "Management's
Discussion and Analysis" in the Fiscal 2002 Annual Report to Stockholders and
is herein incorporated by reference.
ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk
The information required is contained in the section "Market Risk"
under the caption "Management's Discussion and Analysis" in the Fiscal 2002
Annual Report to Stockholders and is herein incorporated by reference.
ITEM 8 - Financial Statements and Supplementary Data
(a) Financial Statements: The financial statements required to be filed
herein are described in Part IV, Item 15 of this report. Except for
the sections included herein by reference, our Fiscal 2002 Annual
Report to Stockholders is not deemed to be filed as part of this
report.
(b) Supplementary Data: The information required is contained under the
caption "Summary of Quarterly Results" in the Fiscal 2002 Annual
Report to Stockholders and is herein incorporated by reference.
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The information required is contained in our Forms 8-K filed on
September 18, 2002 and September 24, 2002, and our Form 8-K/A filed on
September 24, 2002, and is herein incorporated by reference.
PART III
ITEMS 10 and 11 - Directors and Executive Officers of the Registrant and
Executive Compensation
The executive officers of our Company are as follows:
Name Age Current Position
- ----------------------- ---- -----------------------------------------------
Christian W. E. Haub 38 Chairman of the Board, President and
Chief Executive Officer
Eric Claus 46 President and Chief Executive Officer, A&P Canada
William P. Costantini 55 Senior Vice President, General Counsel
& Secretary
Brenda M. Galgano 34 Vice President and Corporate Controller
Mitchell P. Goldstein 42 Senior Vice President, Chief Financial Officer
Peter Johannes Jueptner 40 Executive Vice President, A&P U.S.
John E. Metzger 48 Senior Vice President, Chief Information Officer
William Moss 55 Vice President and Treasurer
Brian Piwek 56 President and Chief Executive Officer, A&P U.S.
The executive officers of our Company are chosen annually and serve
under the direction of the Chief Executive Officer ("CEO") with the consent of
the Board of Directors.
Mr. Haub currently serves as Chairman of the Board, President and Chief
Executive Officer of our Company. He was elected a director on December 3, 1991,
and is Chair of the Executive Committee and a member of the Finance Committee.
Mr. Haub served as Chief Operating Officer of our Company from December 7, 1993,
becoming Co-Chief Executive Officer on April 2, 1997, sole CEO on May 1, 1998
and Chairman of the Board on May 1, 2001. In addition to his other positions,
with the exception of the period between February 2002 through October 2002,
Mr. Haub has served as President of our Company since December 7, 1993. Mr.
Haub, son of Helga Haub, is a partner and Co-Chief Executive Officer of
Tengelmann Warenhandelsgesellschaft KG, a partnership organized under the laws
of the Federal Republic of Germany ("Tengelmann"). Mr. Haub is on the Board of
Directors of the Food Marketing Institute and on the Board of Trustees of St.
Joseph's University.
Mr. Claus was appointed President & Chief Executive Officer, A&P Canada
on November 11, 2002. Prior to joining our Company, Mr. Claus served as Chief
Executive Officer of Co-Op Atlantic, between February 1997 and November 2002.
Mr. Costantini was elected Senior Vice President, General Counsel &
Secretary effective April 24, 2000. Prior to joining our Company, Mr. Costantini
served as Executive Vice President & General Counsel and Senior Vice President &
General Counsel of Olsten Corporation, between June 1992 and March 2000.
Ms. Galgano was appointed Vice President, Corporate Controller on
February 24, 2002. Ms. Galgano served as Assistant Corporate Controller of our
Company from July 2000 to February 2002 and Director of Corporate Accounting
from October 1999 to July 2000. Prior to joining our Company, Ms. Galgano was
with PricewaterhouseCoopers from July 1997 to July 1999 as Senior Manager and
Manager of the Audit and Business Advisory Services Group, respectively.
Mr. Goldstein was elected Senior Vice President & Chief Financial
Officer on February 24, 2002. From January 2000 to February 24, 2002, Mr.
Goldstein was Senior Vice President, Finance & Treasurer of our Company. Prior
to joining our Company, Mr. Goldstein was Chief Financial Officer from October
1998 to January 2000 and Vice President of Strategic Planning and Corporate
Development from September 1997 to October 1998 at Vlasic Foods International.
Before that, he was Director of Strategic Planning at the Campbell Soup Company.
Vlasic Foods International filed a petition under the Federal bankruptcy laws in
January 2001. Mr. Goldstein is on the Board of Advisers of the Rutgers
Business School.
Mr. Jueptner was appointed Executive Vice President, A&P U.S. on
November 15, 2002. Prior to that, Mr. Jueptner served as Senior Vice President,
Chief Strategy Officer from October 1, 2002 to November 15, 2002. Prior to
joining our Company, Mr. Jueptner was Chief Commercial Officer of The Worldwide
Retail Exchange from December 2000 through July 2002. From 1997 through 2000,
Mr. Jueptner held various positions with Campbell Soup Company, lastly, General
Manager, Beverages & Latin America.
Mr. Metzger was appointed Senior Vice President, Chief Information
Officer on February 11, 2002. Prior to that, he was Senior Vice President and
Business Process Initiative Business Leader from May 2001 to February 2002, and
Vice President, Supply & Logistics from October 1999 to May 2001. Prior to
joining our Company, Mr. Metzger was Senior Vice President of CS Integrated LLC
from January 1998 to October 1999 and before that, Vice President, Distribution
& Procurement for General Mills Restaurants, Inc. from October 1993 to November
1998. Mr. Metzger is a director of the Institute for Standards & Collaboration
Commerce, Inc.
Mr. Moss was appointed Vice President, Treasurer on February 24, 2002.
Prior to that Mr. Moss was Vice President, Treasury Services and Risk Management
from 1992 to February 2002.
Mr. Piwek was appointed President and Chief Executive Officer, A&P U.S.
on October 28, 2002. Prior to that, he was Chairman, President and Chief
Executive Officer of The Great Atlantic & Pacific Company of Canada, Limited
from April 1, 2002 and was Vice Chairman, President and Chief Executive Officer
of The Great Atlantic & Pacific Company of Canada, Limited from February 2000.
Before that, Mr. Piwek was Vice Chairman and Co-Chief Executive Officer of The
Great Atlantic & Pacific Company of Canada, Limited from October 1997. Prior to
joining the Company, he was President of Overwaitea Food Group, a retailer and
franchisor in British Columbia and Alberta, Canada.
The information required regarding our directors, executive
compensation and our beneficial ownership reporting compliance is contained
under the captions "Election of Directors", "Executive Compensation" and
"Section 16(a) Beneficial Ownership Reporting Compliance", respectively, in the
Proxy Statement for our 2003 Annual Meeting of Stockholders, to be filed on or
about May 24, 2003 ("Proxy Statement"), and is herein incorporated by reference.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
Beneficial Ownership of More than 5% of the Company's Common Stock
The information required is contained in our Proxy Statement under the
heading "Security Ownership of Certain Beneficial Owners and Management", and is
herein incorporated by reference.
ITEM 13 - Certain Relationships and Related Transactions
The information required is contained in our Proxy Statement under the
heading "Certain Relationships and Transactions", and is herein incorporated by
reference.
ITEM 14 - Controls and Procedures
The information required is contained under the caption "Management's
Report on Financial Statements" in the Fiscal 2002 Annual Report to
Stockholders and is herein incorporated by reference.
PART IV
ITEM 15 - 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 2002 Annual Report to Stockholders. The
following required items are herein incorporated by reference:
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity and
Comprehensive (Loss) Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
2) Financial Statement Schedules are omitted because they are not
required or do not apply, or the required information is included
elsewhere in the Consolidated Financial Statements or Notes thereto.
3) Exhibits:
The following are filed as Exhibits to this Report:
EXHIBIT NO. DESCRIPTION
---------- -----------
3.1 Articles of Incorporation of The Great Atlantic
& Pacific Tea Company, Inc., as amended through
July 1987 (incorporated herein by reference to
Exhibit 3(a) to Form 10-K filed on May 27, 1988)
3.2 By-Laws of The Great Atlantic & Pacific Tea
Company, Inc., as amended through July 2, 2002
(incorporated herein by reference to Exhibit 3.2
to Form 10-K filed on July 5, 2002)
4.1 Indenture, dated as of January 1, 1991 between
the Company and JPMorgan Chase Bank (formerly
The Chase Manhattan Bank as successor by merger
to Manufacturers Hanover Trust Company), as
trustee (the "Indenture") (incorporated herein
by reference to Exhibit 4.1 to Form 8-K)
4.2 First Supplemental Indenture, dated as of
December 4, 2001, to the Indenture, dated as of
January 1, 1991 between our Company and JPMorgan
Chase Bank, relating to the 7.70% Senior Notes
due 2004 (incorporated herein by reference to
Exhibit 4.1 to Form 8-K filed on December 4,
2001)
4.3 Second Supplemental Indenture, dated as of
December 20, 2001, to the Indenture between our
Company and JPMorgan Chase Bank, relating to the
9 1/8% Senior Notes due 2011 (incorporated herein
by reference to Exhibit 4.1 to Form 8-K filed on
December 20, 2001)
4.4* Successor Bond Trustee
10.1 Employment Agreement, made and entered into as of
the 11th day of November, 2002, by and between
our Company and Eric Claus, and Offer Letter
dated the 22nd day of October, 2002
(incorporated herein by reference to Exhibit 10.1
to Form 10-Q filed on January 10, 2003)
10.2 Employment Agreement, made and entered into as
of the 1st day of November, 2000, by and between
our Company and William P. Costantini
(incorporated herein by reference to Exhibit 10
to Form 10-Q filed on January 16, 2001)
("Costantini Agreement")
10.3 Amendment to Costantini Agreement dated April
30, 2002 (incorporated herein by reference to
Exhibit 10.7 to Form 10-K filed on July 5, 2002)
10.4 Employment Agreement, made and entered into as
of the 8th day of January, 2001, by and between
our Company and Elizabeth R. Culligan
(incorporated herein by reference to Exhibit 10
to Form 10-Q filed on January 16, 2001)
("Culligan Agreement")
10.5 Amendment to Culligan Agreement dated April 8,
2002 (incorporated herein by reference to
Exhibit 10.3 to Form 10-K filed on July 5, 2002)
10.6 Employment Agreement, made and entered into as
of the 24th day of February, 2002, by and
between our Company and Mitchell P. Goldstein
(incorporated herein by reference to Exhibit
10.8 to Form 10-K filed on July 5, 2002)
10.7 Employment Agreement, made and entered into as
of the 2nd day of October, 2002, by and between
our Company and Peter Jueptner (incorporated
herein by reference to Exhibit 10.26 to Form
10-Q filed on October 22, 2002)
10.8 Offer Letter dated the 18th day of September,
2002, by and between our Company and Peter
Jueptner (incorporated herein by reference to
Exhibit 10.10 to Form 10-Q filed on January 10,
2003)
10.9 Employment Agreement, made and entered into as
of the 1st day of November, 2000, by and between
our Company and Laurane Magliari (incorporated
herein by reference to Exhibit 10 to Form 10-Q
filed on January 16, 2001) ("Magliari Agreement")
10.10 Amendment to Magliari Agreement dated April 30,
2002 (incorporated herein by reference to Exhibit
10.12 to Form 10-K filed on July 5, 2002)
10.11 Employment Agreement, made and entered into as of
the 14th day of May, 2001, by and between our
Company and John E. Metzger, as amended February
14, 2002 (incorporated herein by reference to
Exhibit 10.13 to Form 10-K filed on July 5, 2002)
10.12 Employment Agreement, made and entered into as of
the 28th day of October, 2002, by and between our
Company and Brian Piwek, and Offer Letter dated
the 23rd day of October, 2002 (incorporated
herein by reference to Exhibit 10.14 to Form
10-Q filed on January 10, 2003)
10.13 Employment Agreement, made and entered into as of
the 25th day of February, 2002 by and between our
Company and David A. Smithies (incorporated
herein by reference to Exhibit 10.14 to Form 10-K
filed on July 5, 2002)
10.14 Supplemental Executive Retirement Plan effective
as of September 30, 1991 (incorporated herein by
reference to Exhibit 10.B to Form 10-K filed on
May 28, 1993)
10.15 Supplemental Executive Retirement Plan effective
as of September 1, 1997 (incorporated herein by
reference to Exhibit 10.B to Form 10-K filed on
May 27, 1998)
10.16 Supplemental Retirement and Benefit Restoration
Plan effective as of January 1, 2001
(incorporated herein by reference to
Exhibit 10(j) to Form 10-K filed on May 23, 2001)
10.17 1994 Stock Option Plan (incorporated herein by
reference to Exhibit 10(e) to Form 10-K filed on
May 24, 1995)
10.18 1994 Stock Option Plan for Non-Employee
Directors (incorporated herein by reference to
Exhibit 10(f) to Form 10-K filed on May 24, 1995)
10.19 Directors' Deferred Payment Plan adopted May 1,
1996 (incorporated herein by reference to
Exhibit 10(h) to Form 10-K filed on May 16, 1997)
10.20 1998 Long Term Incentive and Share Award Plan
(incorporated herein by reference to Exhibit
10(k) to Form 10-K filed on May 19, 1999)
10.21 Credit Agreement dated as of February 23, 2001,
among our Company, The Great Atlantic & Pacific
Company of Canada, Limited and the other
Borrowers party hereto and the Lenders party
hereto, The Chase Manhattan Bank, as U.S.
Administrative Agent, and The Chase Manhattan
Bank of Canada, as Canadian Administrative Agent
("Credit Agreement") (incorporated herein by
reference to Exhibit 10 to Form 10-K filed on May
23, 2001)
10.22 Amendment No. 1 and Waiver, dated as of November
16, 2001 to Credit Agreement (incorporated
herein by reference to Exhibit 10.23 to Form
10-K filed on July 5, 2002)
10.23 Amendment No. 2 dated as of March 21, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.24 to Form 10-K filed on
July 5, 2002)
10.24 Amendment No. 3 dated as of April 23, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.25 to Form 10-K filed on
July 5, 2002)
10.25 Waiver dated as of June 14, 2002 to Credit
Agreement (incorporated herein by reference to
Exhibit 10.26 to Form 10-K filed on July 5, 2002)
10.26 Amendment No. 4 dated as of October 10, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.27 to Form 10-Q filed on
October 22, 2002)
10.27 Amendment No. 5 dated as of February 21, 2003 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.1 to Form 8-K filed on
March 7, 2003)
10.28* Amendment No. 6 dated as of March 25, 2003 to
Credit Agreement
13* Fiscal 2002 Annual Report to Stockholders
16 Letter on Change in Certifying Accountant
(incorporated herein by reference to Forms 8-K
filed on September 18, 2002 and September 24,
2002 and Form 8-K/A filed on September 24, 2002)
21* Subsidiaries of Registrant
23.1* Consent of Independent Accountants from
PricewaterhouseCoopers LLP
23.2* Independent Auditors' Consent from Deloitte &
Touche LLP
* Filed with this 10-K
(b) Reports on Form 8-K
On February 21, 2003, our Company filed a Form 8-K disclosing that
it had executed Amendment No. 5, dated as of February 21, 2003, to its existing
Credit Agreement dated as of February 23, 2001, as amended, with JPMorgan Chase
Bank and the lenders signatory thereto.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
The Great Atlantic & Pacific Tea Company, Inc.
(registrant)
Date: May 8, 2003 By: /s/ Mitchell P. Goldstein
------------------------------------------------
Mitchell P. Goldstein, Senior Vice President 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/ Christian W. E. Haub Chairman of the Board, President and
- --------------------------- Chief Executive Officer
Christian W. E. Haub
/s/ John D. Barline Director
- ---------------------------
John D. Barline
/s/ Rosemarie Baumeister Director
- ---------------------------
Rosemarie Baumeister
/s/ Bobbie Gaunt Director
- ---------------------------
Bobbie Gaunt
/s/ Helga Haub Director
- ---------------------------
Helga Haub
/s/ Dan P. Kourkoumelis Director
- ---------------------------
Dan P. Kourkoumelis
/s/ Edward Lewis Director
- ---------------------------
Edward Lewis
/s/ Richard L. Nolan Director
- ---------------------------
Richard L. Nolan
/s/ Maureen B. Tart-Bezer Director
- ---------------------------
Maureen B. Tart-Bezer
The above-named persons signed this report on behalf of the registrant on May 8,
2003.
/s/ Brenda M. Galgano Vice President, Corporate Controller
- ---------------------------
Brenda M. Galgano May 8, 2003
<PAGE>
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Section 302 Certification
I, Christian W.E. Haub, certify that:
1. I have reviewed this annual report on Form 10-K of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Christian W. E. Haub Date: May 8, 2003
- ------------------------
Christian W. E. Haub
Chairman of the Board,
President and
Chief Executive Officer
<PAGE>
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Section 302 Certification
I, Mitchell P. Goldstein, certify that:
1. I have reviewed this annual report on Form 10-K of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Mitchell P. Goldstein Date: May 8, 2003
- -------------------------
Mitchell P. Goldstein
Senior Vice President,
Chief Financial Officer
<PAGE>
Certification Accompanying Periodic Report
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. ss. 1350)
The undersigned, Christian W. E. Haub, Chairman of the Board, President and
Chief Executive Officer of The Great Atlantic & Pacific Tea Company, Inc.
("Company"), and Mitchell P. Goldstein, Senior Vice President and Chief
Financial Officer of the Company, each hereby certifies that (1) the Annual
Report of the Company on Form 10-K for the period ended February 22, 2003 fully
complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and (2) the information contained in the Report fairly presents, in all
material respects, the financial condition and the results of operations of the
Company.
Dated: May 8, 2003 /s/ Christian W. E. Haub
------------------------
Christian W. E. Haub
Chairman of the Board,
President and
Chief Executive Officer
Dated: May 8, 2003 /s/ Mitchell P. Goldstein
-------------------------
Mitchell P. Goldstein
Senior Vice President,
Chief Financial Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>amendment.txt
<DESCRIPTION>EX. 10.28-AMENDMENT NO. 6 TO CREDIT AGREEMENT
<TEXT>
Exhibit 10.28
AMENDMENT No. 6 dated as of March 25, 2003, to the Credit Agreement dated
as of February 23, 2001, as amended (the "Credit Agreement"), among THE
GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (the "Company"), THE GREAT
ATLANTIC & PACIFIC COMPANY OF CANADA, LIMITED (the "Canadian Borrower"),
COMPASS FOODS, INC., BORMAN'S, INC., KOHL's FOOD STORES, INC., SHOPWELL,
INC., WALDBAUM, INC., SUPER FRESH FOOD MARKETS, INC. and SUPER MARKET
SERVICE CORP. (together with the Company, the "U.S. Borrowers", and the
U.S. Borrowers together with the Canadian Borrower, the "Borrowers"), the
LENDERS party thereto (the "Lenders"), JPMORGAN CHASE BANK (successor to
THE CHASE MANHATTAN BANK), as agent for the U.S. Lenders (in such capacity,
the "U.S. Administrative Agent"), and J. P. MORGAN BANK CANADA, (successor
to THE CHASE MANHATTAN BANK OF CANADA), as agent for the Canadian Lenders
(in such capacity, the "Canadian Administrative Agent", and together with
the U.S. Administrative Agent, the "Administrative Agents").
A. Pursuant to the Credit Agreement, the Lenders have extended
credit to the Borrowers, and have agreed to extend credit to the Borrowers, in
each case pursuant to the terms and subject to the conditions set forth therein.
B. The Borrowers have requested that the Lenders agree to
amend the Credit Agreement as set forth herein.
C. The undersigned Lenders are willing to so amend the Credit
Agreement pursuant to the terms and subject to the
conditions set forth herein.
D. Capitalized terms used and not otherwise defined herein
shall have the meanings assigned thereto in the Credit Agreement.
Accordingly, in consideration of the mutual agreements,
provisions and covenants herein contained and other good and valuable
consideration, the sufficiency and receipt of which are hereby acknowledged, and
subject to the conditions, the parties hereto hereby agree as follows:
SECTION 1. Appointment. The parties hereto hereby agree that
JPMorgan Chase Bank, an authorized foreign bank under the Bank Act (Canada)
carrying on business through its Canadian branch (in such capacity, "JPMorgan
Chase Bank, Toronto Branch"), is appointed Canadian Administrative Agent and
Canadian Collateral Agent, replacing J. P. Morgan Bank Canada, and JPMorgan
Chase Bank, Toronto Branch, hereby accepts such appointment. All fees payable to
J. P. Morgan Bank Canada under the Loan Documents shall be payable to JPMorgan
Chase Bank, Toronto Branch, as successor to J. P. Morgan Bank Canada.
SECTION 2. Amendments. Section 6.07 of the Credit Agreement is
hereby amended by inserting immediately after the text "any Hedging Agreement"
the text ", other than Hedging Agreements entered into in the ordinary course of
business and consistent with past practices of the Company to hedge or mitigate
currency or energy exposure risks to which the Company or any Subsidiary is
exposed in the conduct of its business".
SECTION 3. Representations and Warranties. Each of the
Borrowers and other Loan Parties represents and warrants to
the Administrative Agents and the Lenders that:
(a) This Amendment has been duly executed and delivered by it
and constitutes its legal, valid and binding obligation enforceable
against it in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency, moratorium, reorganization or
other similar laws affecting creditors' rights generally and except as
enforceability may be limited by general principles of equity
(regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(b) After giving effect to this Amendment, the representations
and warranties set forth in Article III of the Credit Agreement are
true and correct in all material respects with the same effect as if
made on the date hereof, except to the extent such representations and
warranties expressly relate to an earlier date.
(c) After giving effect to this Amendment, no Event of
Default, or event that with notice or lapse of time or both would
constitute an Event of Default, has occurred and is continuing.
SECTION 4. Conditions to Effectiveness. This Amendment shall
become effective (as of the date first written above) on the date (the
"Amendment Effective Date") when (i) the Administrative Agents (or their
counsel) shall have received counterparts of this Amendment that, when taken
together, bear the signatures of the Borrowers and the Required Lenders and (ii)
the Administrative Agents shall have received payment of any out-of-pocket
expenses of the Administrative Agents payable by the Borrowers that have been
invoiced before the Amendment Effective Date.
SECTION 5. Expenses. The Borrowers shall reimburse the
Administrative Agents for their reasonable out-of-pocket expenses incurred in
connection with this Amendment, including the reasonable fees and expenses of
Cravath, Swaine & Moore, counsel for the Administrative Agents, and McMillan
Binch, Canadian counsel for the Administrative Agents.
SECTION 6. Effect of Amendment. Except as expressly set forth
herein, this Amendment shall not by implication or otherwise limit, impair,
constitute a waiver of, or otherwise affect the rights and remedies of the
Administrative Agents or the Lenders under the Credit Agreement, and shall not
alter, modify, amend or in any way affect the terms, conditions, obligations,
covenants or agreements contained in the Credit Agreement, which is ratified and
affirmed in all respects and shall continue in full force and effect. Nothing
herein shall be deemed to entitle the Borrowers to a consent to, or a waiver,
amendment, modification or other change of, any terms, conditions, obligations,
covenants or agreements contained in the Credit Agreement in similar or
different circumstances. This Amendment shall apply and be effective only with
respect to the provision of the Credit Agreement specifically referred to
herein.
SECTION 7. Credit Agreement. Except as specifically amended
hereby, the Credit Agreement shall continue in full force and effect in
accordance with the provisions thereof as in existence on the date hereof. After
the date hereof, any reference to the Credit Agreement shall mean the Credit
Agreement as amended hereby. This Amendment shall constitute a Loan Document for
all purposes under the Credit Agreement.
SECTION 8. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 9. Counterparts. This Amendment may be executed in two
or more counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one contract. Delivery of an
executed signature page of this Amendment by facsimile transmission shall be
effective as delivery of a manually executed counterpart hereof.
SECTION 10. Headings. The Section headings used herein are for
convenience of reference only, are not part of this Amendment and are not to
affect the construction of, or to be taken into consideration in interpreting,
this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their respective authorized officers as of the
day and year first written above.
THE GREAT ATLANTIC & PACIFIC
TEA COMPANY, INC.,
by
Name:
Title:
<PAGE>
THE GREAT ATLANTIC & PACIFIC
COMPANY OF CANADA, LIMITED,
by
Name:
Title:
by
Name:
Title:
JPMORGAN CHASE BANK,
individually and as U.S.
Administrative Agent,
by
Name:
Title:
J.P. MORGAN BANK CANADA, as
resigning Canadian Administrative
Agent and Canadian
Collateral Agent,
by
Name:
Title:
JPMORGAN CHASE BANK, TORONTO BRANCH,
as a Lender and successor Canadian
Administrative Agent and Canadian
Collateral Agent,
by
Name:
Title:
<PAGE>
COMPASS FOODS, INC.,
by
Name:
Title:
BORMAN'S, INC.,
by
Name:
Title:
KOHL'S FOOD STORES, INC.,
by
Name:
Title:
SHOPWELL, INC.,
by
Name:
Title:
WALDBAUM, INC.,
by
Name:
Title:
SUPER FRESH FOOD MARKETS, INC.,
by
Name:
Title:
<PAGE>
SUPER MARKET SERVICE CORP.,
by
Name:
Title:
<PAGE>
SIGNATURE PAGE TO AMENDMENT NO. 6
DATED AS OF MARCH 25, 2003, TO THE
CREDIT AGREEMENT DATED AS OF
FEBRUARY 23, 2001, as amended, among
THE GREAT ATLANTIC & PACIFIC TEA
COMPANY, INC., THE GREAT ATLANTIC &
PACIFIC COMPANY OF CANADA, LIMITED,
THE OTHER BORROWERS PARTY THERETO,
THE LENDERS PARTY THERETO, JPMORGAN
CHASE BANK, as U.S. Administrative
Agent, and J. P. MORGAN BANK CANADA,
as Canadian Administrative Agent.
Name of Institution:
by
Name:
Title:
by
Name:
Title:
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>4
<FILENAME>ex13fy2002.txt
<TEXT>
The Great Atlantic & Pacific Tea Company, Inc.
Fiscal 2002
Annual Report to Stockholders
Table of Contents
- -----------------
CEO Letter to Stockholders............................................. 3
Management's Discussion and Analysis................................... 6
Consolidated Statements of Operations.................................. 24
Consolidated Statements of Stockholders' Equity
And Comprehensive (Loss) Income................................. 25
Consolidated Balance Sheets............................................ 26
Consolidated Statements of Cash Flows.................................. 27
Notes to Consolidated Financial Statements............................. 28
Management's Report on Consolidated Financial Statements............... 64
Report of Independent Accountants ..................................... 65
Independent Auditors' Report .......................................... 66
Five Year Summary of Selected Financial Data........................... 67
Executive Officers..................................................... 69
Board of Directors..................................................... 69
Stockholder Information................................................ 70
Company Profile
- ---------------
The Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "our
Company"), based in Montvale, New Jersey, operates combination food and drug
stores, conventional supermarkets and limited assortment food stores in 14 U.S.
states, the District of Columbia and Ontario, Canada, under the A&P(R),
Waldbaum's(TM), Super Foodmart, The Food Emporium(TM), Super Fresh(R), Farmer
Jack(R), Kohl's, Sav-A-Center(R), Dominion(R), Ultra Food & Drug, Food
Basics(TM) and The Barn Markets trade names. Through our Compass Foods Division,
we also manufacture and distribute a line of whole bean coffees under the Eight
O'Clock(R), Bokar(R) and Royale(R) labels, both for sale through our own stores
as well as other retail channels.
CEO Letter to Stockholders
- --------------------------
To Our Stockholders,
Fiscal 2002 was a challenging year for A&P, the supermarket industry,
and most retail sectors. Our performance reflected the general business
environment in the United States, as well as internal issues that impacted our
results. A positive result was the excellent performance of our Canadian
operation, which again achieved strong sales and earnings growth.
The impact and effects of September 11, 2001 continued to weigh
on the Nation's mood and outlook throughout fiscal 2002. Homeland security
issues, the military involvement in Afghanistan, and apprehension about the
eventual war in Iraq fostered ongoing concern that stifled business performance,
personal investments, employment growth and overall consumer spending throughout
our domestic markets.
Across our industry, shoppers emphasized economy. They bought less
overall, traded down to lower-priced alternatives, and for the first time in
many years, spent additional time to save money. This included shopping sale
items across competing supermarkets, as well as discounters, drugstores,
warehouse clubs and other non-traditional food retailers using consumables to
drive traffic in their stores.
Those conditions induced most U.S. food retailers, including our own
retail banners, to invest significant gross margin dollars in more aggressive
promotion and pricing to maintain market share. Although we were successful in
protecting our market share, the cost of doing so was high, making our Company
unprofitable overall.
By the latter part of the year, it became clear that significant
changes were required to halt the decline of our U.S. business, maintain our
momentum in Canada, and ensure our long term financial health. This resulted in
the following actions:
o We created two strategic and structurally independent business units,
A&P U.S. and A&P Canada, each with its own chief executive reporting
directly to me. Brian Piwek, a veteran supermarket industry executive
who had directed the turnaround and development of A&P Canada over the
past five years, was named chief executive of A&P U.S. Eric Claus,
likewise an experienced and successful supermarket industry executive
in Canada, was recruited to succeed Mr. Piwek there.
o Key functions directly supporting retail store operations were moved
out of our Corporate organization and redeployed within the new
business units.
o We reduced administrative overheads by eliminating redundancy, removing
operating layers and consolidating field management in the U.S.
business, and eliminating non-essential Corporate functions without
impacting our ability to govern a public company.
o We implemented a general administrative salary and hiring freeze in our
Corporate office and U.S. business unit, which remains in force.
o We decided to divest non-strategic assets in order to lower debt,
reduce ongoing expenses and devote Company resources to those
businesses with the best potential for profitable growth in our system.
We have completed the sale of our A&P stores in northern New England
and our Kohl's stores in Madison, Wisconsin. We are pursuing the sale
of the Kohl's stores in Milwaukee and our Eight O'Clock Coffee
business. Our target is to realize about $300 million in proceeds when
these divestitures are completed.
These decisive actions will improve our financial position, the quality
and experience of our operating leadership, and our ability to compete in a more
cost-driven environment. In addition, we anticipate benefits from key
infrastructure and operating improvements that progressed in fiscal 2002.
Our supply chain and business process initiative was completed last
year within budget and ahead of schedule. We now have in place the critical
information platform that will enable us to manage our entire grocery supply
chain with advanced supply and logistics, category management, merchandising and
store operations tools and systems. We are now positioned to leverage our scale,
lower operating costs and enhance store product assortments throughout our U.S.
and Canadian operations.
An early benefit of this initiative was our ability to reduce warehouse
and store inventory by approximately $100 million in the two years since we
implemented the supply and logistics component of the total infrastructure. We
anticipate additional improvement as we move forward with the integration of
online ordering capability in all of our stores, a more recently deployed
element of the completed supply chain initiative.
We are also pleased with the progress of our strategic sourcing
initiative. This purchasing approach has helped us to leverage our Company's
scale to produce multi-million dollar savings through the chain-wide procurement
of supplies, equipment and services needed to operate our business. We are
expanding the scope of this initiative, and in addition, integrating it with our
category management efforts to lower the cost of consumer merchandise as well.
I am very pleased with the continued excellent performance of A&P
Canada, which achieved record sales and earnings in fiscal 2002. Although the
more favorable Canadian economy has been a factor in our success, A&P Canada was
well positioned to capitalize by virtue of its leadership, marketing strategies
and operating execution.
Our Canadian Company's mainstream A&P, Dominion and The Barn banners
are establishing a growing reputation for superior fresh foods and customer
service. We also benefited from the ongoing growth of our low cost, low priced,
limited assortment Food Basics concept. We have earmarked significant capital
for our Canadian operations in fiscal 2003, to accelerate our progress in
Canada.
Anticipating no improvement in the economic, consumer or competitive
environment in the U.S., we remain conservative in our overall outlook for sales
and earnings improvement in fiscal 2003. We have prepared for the continuing
challenge by taking steps to lower debt and expenses, securing necessary
financing, and installing experienced retail management in both the U.S. and
Canadian business units.
Our management changes and other decisive actions have begun
stabilizing our U.S. business while driving continued success in Canada, and
will position our Company as a whole to capitalize when conditions improve and
opportunities materialize. Our long term goal remains the growth of our entire
North American business through two equally successful business units, A&P U.S.
and A&P Canada. I am confident that in time, this goal will be achieved.
I want to extend my personal thanks to all of our associates,
customers, suppliers and investors for their continued support in fiscal 2002.
Christian Haub
Chairman of the Board,
President and Chief Executive Officer
<PAGE>
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis
INTRODUCTION
- ------------
This Management's Discussion and Analysis describes matters considered by
Management to be significant to understanding the financial position, results of
operations and liquidity of our Company, including a discussion of the results
of operations as well as liquidity and capital resources. These items are
presented as follows:
o Basis of Presentation - a discussion of our Company's fiscal year-end
o Operating Results and Liquidity and Capital Resources - a discussion of
results for fiscal 2002 and 2001, significant business initiatives,
current and expected future liquidity and the impact of various market
risks on our Company
o Market Risk - a discussion of the impact of market changes on our
consolidated financial statements
o Critical Accounting Estimates - a discussion of significant estimates
made by Management
o Impact of New Accounting Pronouncements - a discussion of authoritative
pronouncements that have been or will be adopted by our Company
BASIS OF PRESENTATION
- ---------------------
Our fiscal year ends on the last Saturday in February. Fiscal 2002 ended
February 22, 2003, fiscal 2001 ended February 23, 2002 and fiscal 2000 ended
February 24, 2001. Fiscal 2002, fiscal 2001 and fiscal 2000 were each comprised
of 52 weeks. Except where noted, all net income (loss) per share data presented
is both basic and diluted.
OPERATING RESULTS AND LIQUIDITY AND CAPITAL RESOURCES
- -----------------------------------------------------
Fiscal 2002 Compared with 2001
- ------------------------------
OVERALL
- -------
Sales for fiscal 2002 were $10.79 billion, compared with $10.97 billion
for fiscal 2001; comparable store sales, which includes stores that have been in
operation for two full fiscal years and replacement stores, increased 0.4%. Net
loss per share for fiscal 2002 was $5.03 compared to a net loss per share of
$1.88 for fiscal 2001. Included in our results for fiscal 2002 was a $134
million provision for income taxes related to our U.S. net deferred tax asset
valuation allowance ($3.48 per share; see Note 9 of our Consolidated Financial
Statements), an extraordinary gain of $12.2 million or $0.31 per share
for the cost of repurchasing $50.7 million of our 7.75% Notes due April 15, 2007
and $44.5 million of our 9.125% Notes due December 15, 2011, a $6.4 million gain
($9.6 million after tax or $0.25 per share) relating to our asset disposition
initiative (see Note 2 of our Consolidated Financial Statements), and a
nonrecurring pretax gain of $1.7 million ($1.0 million after tax or $0.03 per
share) from proceeds received as a result of the sale of securities received as
part of the demutualization of The Prudential Insurance Company (see Note 15 of
our Consolidated Financial Statements).
SALES
- -----
Sales for fiscal 2002 of $10.79 billion decreased $179 million or 1.6%
from sales of $10.97 billion for fiscal 2001. The lower sales were due to a
decrease in retail sales of $215 million partially offset by an increase in
wholesale sales of $36 million. The decrease in retail sales was attributable to
the closure of 114 stores since the beginning of fiscal 2001, of which 42 were
closed in fiscal 2002, which decreased sales by $436 million. Included in the
114 stores closed since the beginning of fiscal 2001 were 37 stores closed as
part of the asset disposition initiative. This decrease was partially
offset by the opening of 52 new stores since the beginning of fiscal 2001, of
which 31 were opened in fiscal 2002, increasing sales by $163 million. This was
additionally offset by increased comparable store sales for fiscal 2002 of 0.4%
(down 1.0% in the U.S. and up 6.6% in Canada) when compared to fiscal 2001 and
the favorable effect of the Canadian exchange rate, which increased sales by $2
million. The increase in wholesale sales was attributable to higher sales volume
of $35 million and the favorable effect of the Canadian exchange rate of
$1 million.
Sales in the U.S. for fiscal 2002 decreased by $366 million or 4.3%
compared to fiscal 2001. Sales in Canada for fiscal 2002 increased by $187
million or 7.5% from fiscal 2001.
Average weekly sales per supermarket were approximately $284,500 for
fiscal 2002 versus $275,100 for the corresponding period of the prior year, an
increase of 3.4%. This increase was primarily due to:
o Closure of smaller stores with lower average weekly sales;
o Closure of underperforming stores; and
o Opening and remodeling of larger stores.
GROSS MARGIN
- ------------
Gross margin as a percentage of sales decreased 40 basis points to 28.31%
for fiscal 2002 from 28.71% for fiscal 2001. The gross margin dollar decrease of
$95 million resulted from decreases in sales volume and the gross margin rate
partially offset by the favorable Canadian exchange rate. The U.S. operations
gross margin decrease of $121 million resulted from decreases of $112 million
due to lower sales volume and $9 million due to a lower gross margin rate. The
Canadian operations gross margin increase of $26 million resulted from increases
of $41 million due to higher sales volume and $1 million from fluctuations in
the Canadian exchange rate partially offset by a decrease of $16 million due to
a lower gross margin rate.
This 40 basis point decrease was caused primarily by the following:
o More aggressive promotional activity during the current period in order to
drive sales volume and protect market share; and
o Increased inventory shrink losses during the current year period compared
to the prior year period.
Included in gross margin for fiscal 2002 and 2001 were costs related to
our asset disposition initiative of $1.2 million and $3.9 million, respectively,
which were incurred to mark down inventory in stores announced for closure.
Gross margin for fiscal 2001 also included costs of $6.3 million incurred
as part of our business process initiative. These costs were incurred to mark
down inventory to be discontinued as a result of detailed category management
studies.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
Store operating, general and administrative expense ("SG&A") was $3.05
billion for fiscal 2002 compared to $3.23 billion for fiscal 2001. As a
percentage of sales, SG&A was 28.24% for fiscal 2002 compared to 29.48% for
fiscal 2001. Included in SG&A for fiscal 2002 and 2001 were net gains of $7.7
million and net costs of $189.6 million, respectively, relating to our asset
disposition initiative as described in Note 2 of our Consolidated Financial
Statements. Also included in SG&A for fiscal 2002 was a gain of $1.7 million
related to the sale of securities received as part of the demutualization of The
Prudential Insurance Company as described in Note 15 of our Consolidated
Financial Statements. Excluding these items, SG&A as a percentage of sales for
fiscal 2002 would have increased 9 basis points compared to decreasing SG&A as
a percentage of sales by 173 basis points for fiscal 2001.
The major items impacting this increase include:
o Higher severance costs in the U.S.;
o Increased labor costs as a percentage of sales in the U.S.;
o Higher consulting costs due to a non-merchandise product and service
sourcing initiative; and
o Higher closed store expenses for stores closed during the
normal course of business.
Partially offset by the following:
o Lower costs related to our business process initiative;
o Higher gains on the sale of property and equipment during fiscal 2002;
o Lower management incentive bonus expenses; and
o A $7 million reduction of accruals for occupancy costs primarily related
to a change in estimate.
Included in SG&A for fiscal 2002 and 2001 were $60.5 million and $91.6
million, respectively, relating to our business process initiative. Such costs
primarily included professional consulting fees and salaries, including related
benefits, of employees working full-time on the initiative.
Also included in SG&A for fiscal 2002 were $18.9 million in impairment
losses related to stores that were or will be closed in the normal course of
business. In fiscal 2001, there was $96.4 million in impairment losses, of which
$80.9 million relates to the asset disposition initiative as discussed in Note 2
of our Consolidated Financial Statements.
INTEREST EXPENSE
- ----------------
Interest expense of $85 million for fiscal 2002 decreased from the prior
year amount of $92 million due primarily to the following:
o Lower interest expense on our Secured Credit Agreement during fiscal
2002 compared to fiscal 2001 due to decreased rates and borrowings; and
o The impact of interest rate swaps which commenced in the fourth quarter
of fiscal 2001.
Partially offset by the following:
o Higher interest expense on the $275 million 9.125% Senior Notes due
December 15, 2011 which were issued to refinance $178 million of the $200
million 7.70% Senior Notes due January 15, 2004.
The decreased borrowing requirement on our Secured Credit Agreement was
primarily caused by the following:
o Cash generated from operating activities;
o Proceeds received from the refinancing of $178 million of the $200
million 7.70% Senior Notes due January 15, 2004 with the issuance of $275
million 9.125% Senior Notes due December 15, 2011; and
o Proceeds received as a result of the demutualization of The Prudential
Insurance Company as described in Note 15 of our Consolidated Financial
Statements.
INCOME TAXES
- ------------
The provision for income taxes for fiscal 2002 was $136.2 million
compared to a benefit from income taxes of $43.6 million in fiscal 2001. The
change in the provision for income taxes relates to the absence of the tax
benefits of U.S. losses that would have been recorded had a valuation allowance
of $133.7 million not been recorded and offset against our net U.S. deferred tax
asset during the second quarter of fiscal 2002. During the remainder of fiscal
2002, the valuation allowance was increased by $32.9 million. Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes"
requires that a valuation allowance be created and offset against the net
deferred tax asset if, based on existing facts and circumstances, it is more
likely than not that some portion or all of the net deferred tax asset will not
be realized (see Note 9 of our Consolidated Financial Statements).
Fiscal 2001 Compared with 2000
- ------------------------------
OVERALL
- -------
Sales for fiscal 2001 were $10.97 billion, compared with $10.62 billion in
fiscal 2000; comparable store sales, which includes stores that have been in
operation for two full fiscal years and replacement stores, increased 2.6%. Net
loss per share for fiscal 2001 was $1.88 compared to a net loss of $0.51 for
fiscal 2000. Included in our results for fiscal 2001 was an extraordinary after
tax loss of $7 million or $0.19 per share for the cost of repurchasing $178
million of our 7.70% Senior Notes due January 15, 2004 and $20 million of our
7.75% Notes due April 15, 2007, a $193 million charge ($112 million after tax or
$2.88 per share - diluted) relating to our asset disposition initiative (see
Note 2 of our Consolidated Financial Statements), and a nonrecurring pretax gain
of $61 million ($35 million after tax or $0.90 per share - diluted) from
proceeds received as a result of the demutualization of The Prudential Insurance
Company.
SALES
- -----
Sales for fiscal 2001 of $10.97 billion increased $350 million or 3.3%
from sales of $10.62 billion for fiscal 2000. The higher sales were due to
increases in retail sales of $304 million and wholesale sales of $46 million.
The increase in retail sales was attributable to the opening of 68 new stores
since the beginning of fiscal 2000, of which 21 were opened in fiscal 2001,
increasing sales by $535 million. This increase was partially offset by the
closure of 121 stores since the beginning of fiscal 2000, of which 72 were
closed in fiscal 2001, which decreased sales by $437 million. Included in the 72
stores closed in fiscal 2001 were 31 stores closed as part of the asset
disposition initiative. Additionally, the unfavorable effect of the Canadian
exchange rate decreased sales by $81 million. The remainder of the increase in
sales was caused primarily by increased comparable store sales, for fiscal 2001
of 2.6% (1.5% in the U.S. and 7.8% in Canada) when compared to fiscal 2000. The
increase in wholesale sales was attributable to higher sales volume of $76
million partially offset by the unfavorable effect of the Canadian exchange
rate, which decreased sales by $30 million.
Sales in the U.S. increased by $243 million or 2.9% compared to fiscal
2000. Sales in Canada increased by $107 million or 4.5% from fiscal 2000.
Average weekly sales per supermarket were approximately $275,100 for
fiscal 2001 versus $263,000 for the corresponding period of the prior year, an
increase of 4.6%.
GROSS MARGIN
- ------------
Gross margin as a percentage of sales increased 8 basis points to 28.71%
for fiscal 2001 from 28.63% for fiscal 2000. The gross margin dollar increase of
$109 million resulted from increases in sales volume and the gross margin rate
partially offset by a decrease in the Canadian exchange rate. The U.S.
operations gross margin increase of $80 million resulted from increases of $74
million due to higher sales volume and $6 million due to a higher gross margin
rate. The Canadian operations gross margin increase of $28 million resulted from
increases of $48 million due to higher sales volume and $5 million due to higher
gross margin rate partially offset by a decrease of $25 million from
fluctuations in the Canadian exchange rate.
Included in gross margin for fiscal 2001 were costs related to our asset
disposition initiative of $3.9 million which were incurred to mark down
inventory in stores announced for closure.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
SG&A was $3.23 billion for fiscal 2001 compared to $2.98 billion for
fiscal 2000. As a percentage of sales, SG&A was 29.48% for fiscal 2001 compared
to 28.01% for fiscal 2000.
Included in SG&A for fiscal 2001 were costs relating to our asset
disposition initiative of $189.6 million as described in Note 2 of our
Consolidated Financial Statements. Excluding this charge, SG&A as a percentage
of sales would have decreased 173 basis points for fiscal 2001. Also included in
SG&A for fiscal 2001 and fiscal 2000 were costs relating to our business process
initiative of $91.6 million and $68.4 million, respectively. These costs
primarily included professional consulting fees and salaries, including related
benefits, of employees working full-time on the initiative. Excluding these
charges, SG&A would have been 256 basis points lower for fiscal 2001 compared to
64 basis points lower for fiscal 2000. In addition, excluding these charges, the
decrease in SG&A as a percentage of sales from fiscal 2000 to fiscal 2001 of 45
basis points was primarily due to lower store advertising costs, lower store
opening and closing costs and lower litigation expense.
GAIN ON PROCEEDS FROM THE DEMUTUALIZATION OF A MUTUAL INSURANCE COMPANY
- -----------------------------------------------------------------------
During fiscal 2001, we received cash and common stock totaling $61 million
from the demutualization of The Prudential Insurance Company. This amount was
recorded as a nonrecurring gain and included in the determination of pretax
income for fiscal 2001.
INTEREST EXPENSE
- ----------------
Interest expense of $92 million for fiscal 2001 decreased from the prior
year amount of $102 million. This was due to decreased borrowing requirements
during fiscal 2001 compared to fiscal 2000 as a result of lower capital
expenditures, a reduction in working capital and the proceeds received on the
sale leaseback transactions described in Note 14 of our Consolidated Financial
Statements. The reduction was also partially due to a decrease in interest
rates.
ASSET DISPOSITION INITIATIVE
- ----------------------------
In May 1998, we initiated an assessment of our business operations in
order to identify the factors that were impacting our performance. As a result
of this assessment, in fiscal 1998 and 1999, we announced a plan to close two
warehouse facilities and a coffee plant in the U.S., a bakery plant in Canada
and 166 stores including the exit of the Richmond, Virginia and Atlanta, Georgia
markets.
As of February 23, 2002, we closed all stores and facilities related to
this phase of the initiative. We paid $29 million of the total net severance
charges from the time of the original charges through February 22, 2003, which
resulted from the termination of approximately 3,400 employees. The remaining
severance liability primarily relates to future obligations for early
withdrawals from multi-employer union pension plans.
The following table summarizes the activity related to the aforementioned
charges over the last three fiscal years:
<TABLE>
<CAPTION>
Severance
and
Occupancy Benefits Total
----------- --------- -----
<S> <C> <C> <C>
Balance at
Feb. 24, 2001 $ 82,861 $ 2,721 $ 85,582
Addition 3,818 (1) - 3,818
Utilization (23,302)(2) (544) (23,846)
---------- -------- --------
Balance at
Feb. 23, 2002 63,377 2,177 65,554
Addition 3,159 (1) - 3,159
Utilization (13,616)(2) (370) (13,986)
Adjustment (3) (3,645) 639 (3,006)
---------- ---------- ----------
Balance at
Feb. 22, 2003 $ 49,275 $ 2,446 $ 51,721
========== ========== =========
(1) The additions to occupancy of $3.8 million and $3.2 million during
fiscal 2001 and 2002 represent the present value of accrued interest
related to lease obligations.
(2) Occupancy utilization of $23.3 million and $13.6 million during
fiscal 2001 and 2002 represent lease and other occupancy payments made
during those periods.
(3) At each balance sheet date, we assess the adequacy of the balance
to determine if any adjustments are required as a result of changes in
circumstances and/or estimates. We have continued to make favorable
progress in marketing and subleasing the closed stores. As a result,
during fiscal 2002, we recorded a reduction of $3.6 million in SG&A
expense related to this phase of the initiative. Further, we increased
our reserve for future minimum pension liabilities by $0.6 million to
better reflect expected future payouts under certain collective
bargaining agreements.
</TABLE>
At February 22, 2003, approximately $8.6 million of the reserve was
included in "Other accruals" and the remaining amount was included in "Other
non-current liabilities" in our Consolidated Balance Sheets.
Included in our Consolidated Statements of Operations are the operating
results of the 166 underperforming stores that we have exited. The operating
results of these stores are as follows:
<TABLE>
<CAPTION>
Fiscal 2002 Fiscal 2001 Fiscal 2000
------------- ------------- -------------
<S> <C> <C> <C>
Sales $ - $ 197 $ 678
======== ======= ==========
Operating loss $ - $ (108) $ (139)
======== ======= ==========
</TABLE>
During the third quarter of fiscal 2001, our Board of Directors approved
a plan resulting from our review of the performance and potential of each of our
businesses and individual stores. At the conclusion of this review, we
determined that certain underperforming operations, including 39 stores (30 in
the United States and 9 in Canada) and 3 warehouses should be closed and/or
sold and certain administrative streamlining should take place. As a result of
these decisions, we announced on November 14, 2001 that we would incur costs of
approximately $200 - $215 million pretax through fiscal 2002. The following
table details the amounts charged to our Consolidated Statements of Operations
since the announcement of this phase of the initiative:
<TABLE>
<CAPTION>
Fiscal 2002 Fiscal 2001
---------------------- ------------------
<S> <C> <C>
Cost of merchandise sold $ (1,263) (a) $ (3,888) (a)
Store operating, general and
administrative expense 4,651 (b) (189,580) (c)
-------------- -----------
Pretax credit (charge) $ 3,388 $ (193,468)
============== ===========
</TABLE>
(a) The amounts included in "Cost of merchandise sold" in our Consolidated
Statements of Operations were comprised solely of inventory markdowns that
were expensed as incurred.
(b) The pretax credit of $4.7 million included in "Store operating, general
and administrative expense" in our Consolidated Statements of Operations
for fiscal 2002 consisted of $10.7 million of net adjustments primarily
related to reversals of previously accrued amounts for vacancy related
costs and the recognition of a gain on the disposal of fixed assets in the
amount of $1.7 million partially offset by $4.1 million related to closing
costs that were expensed as incurred and $3.6 million related to
severance.
(c) Of the pretax charges of $189.6 million net included in "Store operating,
general and administrative expense" in our Consolidated Statements of
Operations for fiscal 2001, $80.8 million related to future vacancy costs,
$24.3 million related to net severance charges, $81.5 million related to
fixed asset and goodwill write-downs and $3.0 million related to closing
costs that were expensed as incurred.
To the extent fixed assets included in the items noted above could be
used in other continuing operations, we have or will transfer those assets as
needed. Fixed assets that we cannot transfer to other operations will be
scrapped. Accordingly, the write-down recorded during fiscal 2001 was based on
expected transfers.
Included in the $3.4 million net credit and $193.5 million net charge
recorded during fiscal 2002 and 2001, respectively, were other charges related
to the plan that were not accounted for in the reserve recorded on our
Consolidated Balance Sheets because they were expensed as incurred. Such costs
have been expensed as incurred while the asset disposition was being executed.
During fiscal 2002 and 2001, these costs amounted to $5.3 million and $8.7
million, respectively, which were primarily related to non-accruable closing
costs and inventory markdowns. Also included in the $193.5 million net charge
recorded during fiscal 2001 was a reversal of previously accrued severance and
benefits of $0.6 million related to a reduction in the severance payments
required to be made to certain store employees in Canada in accordance with
Ontario provincial law. During fiscal 2002, we recorded net adjustments of $10.7
million primarily related to reversals of previously accrued vacancy related
costs. Refer to note (3) in the table below. These costs for both years are
excluded from the table below, which represents only the reserve recorded on
our Consolidated Balance Sheets as well as the goodwill/fixed asset writedowns.
The following table summarizes the activity related to the aforementioned
reserve recorded on our Consolidated Balance Sheets since the announcement of
the charge in November 2001:
<TABLE>
<CAPTION>
Severance
and Goodwill/
Occupancy Benefits Fixed Assets Total
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Original Charge $ 80,456 $ 23,435 $ 81,519 $ 185,410
Addition (1) 1,673 - - 1,673
Utilization (2) (1,806) (2,891) (81,519) (86,216)
Adjustment (3) - (584) - (584)
--------- --------- --------- -----------
Balance at
February 23, 2002 80,323 19,960 - 100,283
Addition (1) 4,090 3,544 - 7,634
Utilization (2) (20,387) (19,460) 776 (39,071)
Adjustment (3) (10,180) 250 (776) (10,706)
---------- --------- ---------- -----------
Balance at
February 22, 2003 $ 53,846 $ 4,294 $ - $ 58,140
========= ========= ========= ===========
</TABLE>
(1) The additions to occupancy of $1.7 million and $4.1 million during
fiscal 2001 and fiscal 2002 represent the present value of accrued
interest related to lease obligations. The addition to severance of
$3.5 million during fiscal 2002 related to retention and productivity
incentives that were accrued as earned.
(2) Occupancy utilization of $1.8 million and $20.4 million during fiscal
2001 and fiscal 2002 represents vacancy related payments for closed
locations. Severance utilization of $2.9 million and $19.5 million
during fiscal 2001 and fiscal 2002 represents payments made to
terminated employees during the period. Goodwill/fixed asset
utilization of $81.5 million during fiscal 2001 represents the
write-off of fixed assets of the operations to be discontinued and the
write-off of goodwill related to the Barn warehouse in Canada that was
deemed to be impaired.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. As a result, during fiscal 2001, we
recorded an adjustment to severance and benefits of $0.6 million
related to a reduction in the severance payments required to be made
to certain store employees in Canada. Under Ontario provincial law,
employees to be terminated as part of a mass termination are entitled
to receive compensation, either worked or paid as severance, for a set
period of time after the official notice date. Since such closures
took place later than originally expected, less time remained in the
aforementioned guarantee period. Further, during fiscal 2002, we
recorded net adjustments of $10.7 million primarily related to
reversals of previously accrued vacancy related costs due to the
following:
o Favorable results of assigning leases at certain locations of
$3.6 million;
o The decision to continue to operate one of the stores previously
identified for closure due to changes in the competitive
environment in the market in which that store is located of $3.3
million; and
o The decision to proceed with development at a site that we had
chosen to abandon at the time of the original charge due to
changes in the competitive environment in the market in which that
site is located of $3.3 million.
As of February 22, 2003, we paid approximately $22 million of the total
severance charge recorded, which resulted from the termination of approximately
1,100 employees. The remaining individual severance payments will be paid by the
end of fiscal 2003.
At February 22, 2003, approximately $10.7 million of the reserve was
included in "Other accruals" and the remaining amount was included in "Other
non-current liabilities" on our Consolidated Balance Sheets.
Included in our Consolidated Statements of Operations for fiscal 2002,
2001 and 2000 are the sales and operating results of the aforementioned stores
while they were open during the periods presented. The operating results of
these stores were as follows:
<TABLE>
<CAPTION>
Fiscal 2002 Fiscal 2001 Fiscal 2000
------------- ------------- -------------
<S> <C> <C> <C>
Sales $23,367 $266,802 $319,812
======= ======== ========
Operating loss $ (746) $(24,376) $(24,332)
========= ======== ========
</TABLE>
As of February 22, 2003, we had closed all of the aforementioned stores
except the one location in the United States at which we have decided to
continue operations and one location in Canada where the closing was
dependent upon the opening of another store in close proximity. This store
subsequently closed in March 2003.
Based upon current available information, we evaluated the reserve
balances as of February 22, 2003 of $51.7 million for the 1998 phase of the
asset disposition initiative and $58.1 million for the 2001 phase of the asset
disposition initiative and have concluded that they are adequate. We will
continue to monitor the status of the vacant properties and adjustments to the
reserve balances will be recorded in the future, if necessary.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
We had working capital of $9 million at February 22, 2003 compared to
working capital of $28 million at February 23, 2002. We had cash and cash
equivalents aggregating $199 million at February 22, 2003 compared to $169
million at the end of fiscal 2001. The decrease in working capital was
attributable primarily to the following:
o A decrease in the current portion of the net deferred tax asset due to the
recording of a valuation allowance for the entire U.S. net deferred tax
asset during fiscal 2002 (see Note 9 of our Consolidated Financial
Statements);
o A decrease in inventories due to improved inventory management; and
o An increase in current maturities of our debt obligations and capital
leases.
Partially offset by the following:
o An increase in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows;
o A decrease in accounts payable (inclusive of book overdrafts); and
o A decrease in other accruals.
At February 22, 2003, we had a $425 million secured revolving credit
agreement (as amended, the "Secured Credit Agreement") with a syndicate of
lenders enabling us to borrow funds on a revolving basis sufficient to refinance
short-term borrowings and provide working capital as needed. This agreement is
comprised of a U.S. credit agreement amounting to $340 million and a Canadian
credit agreement amounting to $85 million (C$128 million at February 22, 2003)
and is collateralized primarily by inventory and company-owned real estate.
Borrowings under the Secured Credit Agreement bear interest based on LIBOR and
Prime interest rate pricing. Under the Secured Credit Agreement, $40 million of
the loan commitments expire in December 2003 and $385 million of the loan
commitments expire in June 2005.
As of February 22, 2003, we had $135 million of borrowings under the
Secured Credit Agreement. Accordingly, as of February 22, 2003, after reducing
availability for outstanding letters of credit and inventory requirements, we
had $130 million available under the Secured Credit Agreement.
Our loan agreements and certain notes contain various financial
covenants, which require among other things, minimum fixed charge coverage
(compares EBITDA plus rent and interest plus rents) and levels of leverage
(compares EBITDA with outstanding indebtedness under the agreement) and capital
expenditures. On February 21, 2003, we amended the Secured Credit Agreement in
order to allow for greater flexibility for fiscal year 2003. The amendment is
effective through and including the first quarter of fiscal year 2004 and
includes, among other things, a change to the fixed coverage ratio from 1.4 to
1.15, a senior secured leverage ratio of 1.80, a waiver of the total leverage
ratio, a minimum EBITDA level, and a limitation on capital expenditures. Certain
of the covenants are impacted by the amount of proceeds we receive from asset
sales. At February 22, 2003, we were in compliance with all of our covenants.
During fiscal 2002, we repurchased in the open market $51 million of our
7.75% Notes due April 15, 2007 and $45 million of our 9.125% Notes due December
15, 2011. The cost of these open market repurchases resulted in a net
extraordinary gain due to the early extinguishment of debt of $12.2 million.
Under the recently amended Secured Credit Agreement, we are restricted from
entering into additional bond repurchases.
We currently have active Registration Statements dated January 23, 1998
and June 23, 1999, allowing us to offer up to $75 million of debt and/or equity
securities as of February 22, 2003 at terms determined by market conditions at
the time of sale.
During fiscal 2002, our capital expenditures and debt repayments were
funded through internally generated funds combined with proceeds from disposals
of property. Capital expenditures totaled $220 million during fiscal 2002, which
included 31 new supermarkets, 38 major remodels or enlargements and capital
expenditures related to the business process initiative.
For fiscal 2003, we have planned capital expenditures of approximately
$175 million. These expenditures relate primarily to opening 20 new supermarkets
and enlarging or remodeling 30 - 35 supermarkets. We currently expect to close a
total of 20 - 25 stores in fiscal 2003; the long-lived assets of which have
been evaluated for impairment in fiscal 2002.
We do not expect to pay dividends during fiscal 2003.
As of February 22, 2003, we have the following contractual obligations
and commitments:
<TABLE>
<CAPTION>
Payments Due by Period (in millions)
-----------------------------------------------------------------------------------
Contractual Fiscal 2004 Fiscal 2006
Obligations Total Fiscal 2003 and 2005 and 2007 Thereafter
---------------------- ------------- ------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Debt $ 829.1 $ 25.8 $ 139.5 $ 231.9 $ 431.9
Capital Leases 190.5 23.2 36.5 23.6 107.2
Operating Leases 3,488.7 265.5 499.6 471.2 2,252.4
Technology-Related 11.8 9.0 2.8 - -
Severance 16.0 14.4 1.6 - -
---------- --------- --------- --------- ----------
Total $ 4,536.1 $ 337.9 $ 680.0 $ 726.7 $ 2,791.5
========== ========= ========= ========= ==========
Expiration of Commitments (in millions)
-----------------------------------------------------------------------------------
Other Fiscal 2004 Fiscal 2006
Commitments Total Fiscal 2003 and 2005 and 2007 Thereafter
---------------------- ------------- -------------- ------------- ------------- -------------
Guarantees $ 2.4 $ 0.2 $ 0.4 $ 0.5 $ 1.3
========== ========= ========= ========= ==========
</TABLE>
We are the guarantor of a loan of $2.4 million related to a shopping
center, which will expire in 2011.
Our existing senior debt rating was B3 with negative implications with
Moody's Investors Service ("Moody's") and B+ on credit watch with negative
implications with Standard & Poor's Ratings Group ("S&P") as of February 22,
2003. Future rating changes could affect the availability and cost of financing
to the Company.
We believe that our cash from operations and asset sales will be sufficient
for our capital expenditure programs and mandatory scheduled debt repayments for
the next twelve months. However, certain external factors such as unfavorable
economic conditions, competition, labor relations and fuel and utility costs
could have a significant impact on cash generation. We are exploring several
actions, including the sale of specific non-core assets, to mitigate the
potential risk, however, there can be no assurance that such actions will be
successful.
MARKET RISK
- -----------
Market risk represents the risk of loss from adverse market changes that
may impact our consolidated financial position, results of operations or cash
flows. Among other possible market risks, we are exposed to such risk in the
areas of interest rates and foreign currency exchange rates.
From time to time, we may enter hedging agreements in order to manage
risks incurred in the normal course of business including forward exchange
contracts to manage our exposure to fluctuations in foreign exchange rates.
Interest Rates
- --------------
Our exposure to market risk for changes in interest rates relates
primarily to our debt obligations. We do not have cash flow exposure due to rate
changes on our $681 million in notes as of February 22, 2003 because they are at
fixed interest rates. However, we do have cash flow exposure on our committed
bank lines of credit due to our variable floating rate pricing. Accordingly,
during fiscal 2002, a presumed 1% change in the variable floating rate would
have impacted interest expense by $1.5 million.
During fiscal 2002, we had three interest rate swaps with commercial
banks with an aggregate notional amount of $150 million maturing on April 15,
2007, designated as fair value hedging instruments, to effectively convert a
portion of our 7.75% Notes due April 15, 2007 from fixed rate debt to floating
rate debt. In January 2003, these hedging instruments were terminated, resulting
in a gain of $10.2 million. This gain has been deferred and is being amortized
as an offset to interest expense over the life of the underlying debt
instrument. Such amount is classified as "Long term debt" in our Consolidated
Balance Sheets.
Foreign Exchange Risk
- ---------------------
We are exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. During fiscal 2002, a change in the
Canadian currency of 10% would have resulted in a fluctuation in net income of
$4.0 million. We do not believe that a change in the Canadian currency of 10%
will have a material effect on our financial position or cash flows.
CRITICAL ACCOUNTING ESTIMATES
- -----------------------------
Critical accounting estimates are those accounting estimates that we
believe are important to the portrayal of our financial condition and results of
operations and require our most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("U.S. GAAP")
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
Self-Insurance Reserves
Our Consolidated Balance Sheets include liabilities with respect to
self-insured workers' compensation and general liability claims. We estimate the
required liability of such claims on a discounted basis, utilizing an actuarial
method, which is based upon various assumptions, which include, but are not
limited to, our historical loss experience, projected loss development factors,
actual payroll and other data. The total current and non-current liability for
self-insurance reserves recorded at February 22, 2003 related to our U.S. Retail
segment was $92 million. As of February 22, 2003, the self-insurance reserves
relating to our Canada Retail and Canada Wholesale segments were not
significant. The discount rate used at February 22, 2003 was 3.4% and was based
on the projected cash flows of future payments to be made for claims. A 1%
increase in the discount rate would decrease the required liability by $1.9
million. Conversely, a 1% decrease in the discount rate would increase the
required liability by $2.1 million. The required liability is also subject to
adjustment in the future based upon the changes in claims experience, including
changes in the number of incidents (frequency) and changes in the ultimate cost
per incident (severity).
Long-Lived Assets
We review the carrying values of our long-lived assets for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. Such review is based upon
groups of assets and the undiscounted estimated future cash flows from such
assets to determine if the carrying value of such assets are recoverable from
their respective cash flows. If such review indicates an impairment exists, we
measure such impairment on a discounted basis using a probability weighted
approach and a risk free rate.
We also review individual assets for impairment upon determination that
such assets will not be used for their intended useful life. During fiscal 2002,
we recorded impairment losses on property, plant and equipment of $18.9 million
($15.7 million in our U.S. Retail segment and $3.2 million in our Canada Retail
segment) related to stores that were or will be closed in the normal course of
business.
Closed Store Reserves
For stores closed that are under long-term leases, we record a discounted
liability using a risk adjusted rate for the future minimum lease payments and
related costs, such as utilities and taxes, from the date of closure to the end
of the remaining lease term, net of estimated probable recoveries from projected
sublease rentals. If estimated cost recoveries exceed our liability for future
minimum lease payments, the excess is recognized as income over the term of the
sublease. We estimate future net cash flows based on our experience in and our
knowledge of the market in which the closed store is located. However, these
estimates project net cash flow several years into the future and are affected
by variable factors such as inflation, real estate markets and economic
conditions. While these factors have been relatively stable in recent years,
variation in these factors could cause changes to our Company's estimates. As of
February 22, 2003, we had liabilities for future minimum lease payments of $131
million which related to 84 dark stores and 40 subleased or assigned stores. Of
this amount, $28 million relates to stores closed in the normal course of
business and $103 million relates to stores closed as part of the asset
disposition initiative (see Note 2 of our Consolidated Financial Statements).
Employee Benefit Plans
The determination of our obligation and expense for pension and other
post-retirement benefits is dependent, in part, on our selection of certain
assumptions used by our actuaries in calculating these amounts. These
assumptions are disclosed in Note 10 of our consolidated financial statements
and include, among other things, the discount rate, the expected long-term rate
of return on plan assets and the rates of increase in compensation and health
care costs. In accordance with U.S. GAAP, actual results that differ from our
Company's assumptions are accumulated and amortized over future periods and,
therefore, affect our recognized expense and recorded obligation in such future
periods. While we believe that our assumptions are appropriate, significant
differences in our actual experience or significant changes in our assumptions
may materially affect our pension and other post-retirement obligations and our
future expense.
An example of how changes in these assumptions can affect our
financial statements occurred in fiscal 2002. Based on our review of market
interest rates, actual return on plan assets and other factors, we lowered our
discount rate for U.S. plans to 6.50% at year-end 2002 from 7.00% at year-end
2001. We also lowered our expected return on plan assets for U.S. plans to 7.50%
at year-end 2002 from 8.00% at year-end 2001. These rates are applied to the
calculated value of plan assets and liabilities, which results in an amount that
is included in pension expense or income in the following years. When not
considering other changes in assumptions or actual return on plan assets, a 1%
change in the discount rate alone would either increase the benefit obligation
by $11.2 million or decrease the benefit obligation by $9.3 million, and a 1%
change in expected return on plan assets alone would either increase or
decrease 2002 U.S. pension expense by $1.4 million.
When not considering other changes in assumptions for our post-retirement
benefits, a 1% change in the discount rate alone would either increase or
decrease 2003 service and interest cost by $0.05 million, while the accumulated
post-retirement benefit obligation would either increase by $2.0 million or
decrease by $1.7 million. The effect of a 1% change in the assumed
health care cost trend rate for each future year on the sum of 2003 service and
interest cost would either increase or decrease by $0.1 million, while the
accumulated post-retirement benefit obligaton would either increase by $1.5
million or decrease by $1.3 million.
Inventories
Store inventories are valued principally at the lower of cost or market
with cost determined under the retail method on a first-in, first-out basis.
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. We evaluate inventory shrinkage
throughout the year based on actual physical counts in our stores and
distribution centers and record reserves based on the results of these counts to
provide for estimated shrinkage between the store's last inventory and the
balance sheet date.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
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In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 143, "Accounting For Asset Retirement Obligations" ("SFAS 143"). This
Statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. We are required to adopt the provisions of SFAS 143 at
the beginning of fiscal 2003. We have determined that the adoption of this
Statement will not have a material impact on our financial position or results
of operations.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections" ("SFAS
145"). SFAS 145 rescinds the provisions of SFAS 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS 44 regarding transition to the Motor
Carrier Act of 1980 and amends the provisions of SFAS 13 to require that certain
lease modifications be treated as sale leaseback transactions. The provisions of
SFAS 145 related to classification of debt extinguishment are effective for
fiscal years beginning after May 15, 2002. In future periods, we will classify
debt extinguishment costs within income from operations and will reclassify
previously reported debt extinguishments as such. The provisions of SFAS 145
related to lease modification are effective for transactions occurring after May
15, 2002. We do not expect the provisions of SFAS 145 related to lease
modification to have a material impact on our financial position or results of
operations.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will supersede Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". SFAS 146 requires that costs
associated with an exit or disposal plan be recognized when incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. This Statement impacted the timing of recognition of costs associated
with our store closures subsequent to December 31, 2002.
In November 2002, the EITF reached consensus on several issues related
to EITF 02-16, "Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor". The Task Force reached a consensus that
in most cases, cash consideration received by a customer from a vendor is
presumed to be a reduction of the prices of the vendor's products or services
and should, therefore, be characterized as a reduction of cost of sales when
recognized in the customer's income statement. The Task Force also reached a
consensus that a rebate or refund of a specified amount of cash consideration
that is payable pursuant to a binding arrangement only if the customer completes
a specified cumulative level of purchases or remains a customer for a specified
time period should be recognized as a reduction of the cost of sales based on a
systematic and rational allocation of the cash consideration offered to each of
the underlying transactions that results in progress by the customer toward
earning the rebate or refund, provided the amounts are probable and reasonably
estimable. If the rebate or refund is not probable and reasonably estimable, it
should be recognized as the milestones are achieved. Prior to adopting this new
policy, we recognized advertising allowances against cost of goods sold when the
advertising was performed. This new EITF Issue requires that advertising
allowances be recognized when the advertising is performed and the inventory is
sold. As a result of this accounting change, pretax income was reduced by
$2.2 million in fiscal 2