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<SEC-DOCUMENT>0001125282-04-002476.txt : 20040521
<SEC-HEADER>0001125282-04-002476.hdr.sgml : 20040521
<ACCEPTANCE-DATETIME>20040521165709
ACCESSION NUMBER: 0001125282-04-002476
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20040228
FILED AS OF DATE: 20040521
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: 04824795
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>b332049_10k.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
<PAGE>
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 28, 2004
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. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ X ] No [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of the close of business on September 5, 2003, the
registrant's most recently completed second fiscal quarter, was $374,772,531.
The number of shares of common stock outstanding as of the close of
business on May 20, 2004 was 38,520,530.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part I, Items 1 and 3, and Part II, Items
5, 6, 7, 7A, 8, 9A and 15 are incorporated by reference from the Registrant's
Fiscal 2003 Annual Report to Stockholders. The information required by Part
II, Items 12, 13 and 14 are incorporated by reference from the Registrant's
Proxy Statement.
<PAGE>
PART I
ITEM 1 - Business
General
- -------
The Great Atlantic & Pacific Tea Company, Inc. ("A&P", "we", "our",
"us" or "our Company") is engaged in the retail food business. We operated 633
stores averaging approximately 39,100 square feet per store as of February 28,
2004. In addition, we served as wholesaler to 63 franchise stores in Canada
averaging approximately 32,500 square feet per store as of February 28, 2004. On
the basis of reported sales for fiscal 2003, we believe that we are among North
America's largest retail food chains.
Operating under the trade names A&P(R), Super Fresh(R),
Sav-A-Center(R), Farmer Jack(R), Waldbaum's(TM), Super Foodmart, Ultra Food &
Drug, Dominion(R), Food Basics(R), The Barn Markets(R) and The Food Emporium(R),
we sell groceries, meats, fresh produce and other items commonly offered in
supermarkets. In addition, many stores have bakery, delicatessen, pharmacy,
floral, fresh fish and cheese departments and on-site banking. National,
regional and local brands are sold as well as private label merchandise. In
support of our retail operations, we sell other private label products in our
stores under other brand names of our Company which include without limitation,
America's Choice(R), Master Choice(R), Health Pride(R), Savings Plus and The
Farm.
Building upon a broad base of A&P supermarkets, our Company has
historically expanded and diversified within the retail food business through
the acquisition of other supermarket chains and the development of several
alternative store types. We now operate our stores with merchandise, pricing and
identities tailored to appeal to different segments of the market, including
buyers seeking gourmet and ethnic foods, a wide variety of premium quality
private label goods and health and beauty aids along with the array of
traditional grocery products.
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 2003, we expended approximately $135 million for capital
projects, which included 19 new supermarkets and 2 major remodels or
enlargements. Our Company has planned capital expenditures of approximately $275
to $300 million in fiscal 2004. These expenditures relate primarily to opening
10 to 15 new supermarkets, converting 30 to 35 stores to new formats, and
enlarging or remodeling 100 - 125 supermarkets. In addition, we plan to continue
with at least similar levels of capital expenditures in fiscal 2005 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.
Employees
- ---------
As of February 28, 2004, we had approximately 74,000 employees, of
which 69% were employed on a part-time basis. Approximately 89% of our employees
are covered by union contracts.
Competition
- -----------
The supermarket business is highly competitive throughout the marketing
areas served by our Company and is generally characterized by low profit margins
on sales with earnings primarily dependent upon rapid inventory turnover,
effective cost controls and the ability to achieve high sales volume. We compete
for sales and store locations with a number of national and regional chains, as
well as with many independent and cooperative stores and markets.
Segment Information
- -------------------
The segment information required is contained under the caption "Note
15 - Operating Segments" in the Fiscal 2003 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 7 - Wholesale Franchise Business", "Note 11 -
Income Taxes", "Note 12 - Retirement Plans and Benefits", "Note 14 - Commitments
and Contingencies" and "Note 15 - Operating Segments" in the Fiscal 2003 Annual
Report to Stockholders and is herein incorporated by reference.
ITEM 2 - Properties
At February 28, 2004, we owned 84 properties consisting of the
following:
Stores, Not Including Stores in Owned Shopping Centers
------------------------------------------------------
Land and building owned 20
Building owned and land leased 17
Land owned and building leased 1
----
Total stores 38
Shopping Centers
----------------
Land and building owned 5
Building owned and land leased 3
----
Total shopping centers 8
Warehouses
----------
Land and building owned 7
Administrative and Other Properties
-----------------------------------
Land and building owned 10
Building owned and land leased 3
Property under development building owned and land leased 2
Property under development land and building owned 1
Property under development land only 2
Undeveloped land 13
----
Total other properties 31
----
Total Properties 84
====
At February 28, 2004, we operated 633 retail stores and serviced 63
franchised stores. These stores are geographically located as follows:
Company Stores:
--------------
New England States:
------------------
Connecticut 31
----
Total 31
Middle Atlantic States:
----------------------
District of Columbia 1
Delaware 9
Maryland 31
New Jersey 96
New York 142
Pennsylvania 24
----
Total 303
Midwestern States:
-----------------
Michigan 90
Ohio 6
----
Total 96
Southern States:
---------------
Louisiana 20
Mississippi 4
----
Total 24
----
Total United States 454
Ontario, Canada 179
----
Total Stores 633
====
Franchised Stores:
Ontario, Canada 63
----
Total Franchised Stores 63
====
The total area of all of our operated retail stores is 24.7 million
square feet averaging approximately 39,100 square feet per store. Excluding
liquor and The Food Emporium(R) stores, which are generally smaller in size,
the average store size is approximately 41,700 square feet. The total area of
all franchised stores is 2.0 million square feet averaging approximately 32,500
square feet per store. The 19 new stores opened in fiscal 2003 consisted of 19
supermarkets and range in size from 19,900 to 63,900 square feet, with an
average size of approximately 44,300 square feet. The stores built over the past
several years and those planned for fiscal 2004 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 2003, we operated 12 warehouses to service our
store network. These warehouses are geographically located as follows:
Louisiana 1
Maryland 1
Michigan 2
New Jersey 1
New York 2
Pennsylvania 1
----
Total United States 8
Ontario, Canada 4
----
Total Warehouses 12
====
There was no real estate pledged as collateral for outstanding mortgage
loans as of February 28, 2004. The net book value of real estate pledged as
collateral for the Company's $400 million Secured Revolving Credit Agreement
amounted to $22.8 million as of February 28, 2004.
ITEM 3 - Legal Proceedings
The information required is contained under the caption "Note 14 -
Commitments and Contingencies" in the Fiscal 2003 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 2003.
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 2003 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 2003 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 2003 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 2003
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 2003 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 2003 Annual
Report to Stockholders and is herein incorporated by reference.
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants on
accounting and financial disclosure during the fiscal year ended February 28,
2004.
ITEM 9A - Controls and Procedures
The information required is contained under the caption "Management's
Report on Financial Statements" in the Fiscal 2003 Annual Report to Stockholders
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 39 Chairman of the Board, President and
Chief Executive Officer
Eric Claus 47 President and Chief Executive
Officer, A&P Canada
William P. Costantini 56 Senior Vice President, General
Counsel & Secretary
Brenda M. Galgano 35 Vice President and Corporate
Controller
Mitchell P. Goldstein 43 Senior Vice President, Chief
Financial Officer
Peter Johannes Jueptner 41 Executive Vice President, A&P U.S.
John E. Metzger 49 Senior Vice President, Chief
Information Officer
William Moss 56 Vice President and Treasurer
Brian Piwek 57 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 in Philadelphia, Pennsylvania.
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.
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
1997. 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 2004 Annual Meeting of Stockholders, to be filed on or
about May 24, 2004 ("Proxy Statement"), and is herein incorporated by reference.
Audit Committee Financial Expert
- --------------------------------
The Board has determined that each member of the Audit Committee is
independent in accordance with the NYSE listing rules, the Company's Standards
of Independence and Rule 10A-3 of the Exchange Act. In addition, the Board
has determined that each member of the Audit Committee qualifies as an "audit
committee financial expert," as defined by the SEC.
Code of Business Conduct and Ethics
- -----------------------------------
Our Company has adopted a Code of Business Conduct and Ethics
applicable to all employees. This Code is applicable to Senior Financial
Executives including the chief executive officer, chief financial officer and
chief accounting officer of our Company. A&P's Code of Business Conduct and
Ethics is available on the Company's Web site at www.aptea.com under "Corporate
Governance" and as Exhibit 14 to this Form 10-K. Our Company intends to post on
its web site any amendments to, or waivers from, its Code of Business Conduct
and Ethics applicable to Senior Financial Executives.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
Beneficial Ownership of More than 5% of the Company's Common Stock
The information required is contained in our Proxy Statement under the
heading "Security Ownership of Certain Beneficial Owners and Management", and is
herein incorporated by reference.
ITEM 13 - Certain Relationships and Related Transactions
The information required is contained in our Proxy Statement under the
heading "Certain Relationships and Transactions", and is herein incorporated by
reference.
ITEM 14 - Principal Accounting Fees and Services
The information required is contained in our Proxy Statement under the
heading "Independent Public Accountants", 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 2003 Annual Report to Stockholders. The
following required items are herein incorporated by reference:
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity and
Comprehensive (Loss) Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Accountants
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 (incorporated herein by
reference to Exhibit 4.4 to Form 10-K filed on
May 9, 2003)
10.1 Employment Agreement, made and entered into as of
the 11th day of November, 2002, by and between
our Company and Eric Claus, and Offer Letter
dated the 22nd day of October, 2002 (incorporated
herein by reference to Exhibit 10.1 to Form 10-Q
filed on January 10, 2003)
10.2 Employment Agreement, made and entered into as
of the 1st day of November, 2000, by and between
the Company and William P. Costantini
(incorporated herein by reference to Exhibit 10
to Form 10-Q filed on January 16, 2001)
("Costantini Agreement")
10.3 Amendment to Costantini Agreement dated April
30, 2002 (incorporated herein by reference to
Exhibit 10.7 to Form 10-K filed on July 5, 2002)
10.4 Employment Agreement, made and entered into as
of the 16th day of June, 2003, by and between our
Company and Brenda Galgano (incorporated herein
by reference to Exhibit 10.9 to Form 10-Q filed
on October 17, 2003)
10.5 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)
10.6 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 October 22, 2002)
10.7 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)
10.8 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)
10.9 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)
10.10 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)
10.11 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)
10.12 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)
10.13 1994 Stock Option Plan (incorporated herein by
reference to Exhibit 10(e) to Form 10-K filed on
May 24, 1995)
10.14 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)
10.15 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)
10.16 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)
10.17 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)
10.18 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)
10.19 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)
10.20 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)
10.21 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)
10.22 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)
10.23 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)
10.24 Amendment No. 6 dated as of March 25, 2003 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.28 to Form 10-K filed on
May 9, 2003)
10.25 Amended and Restated Credit Agreement dated as of
February 23, 2001 and amended and restated as of
December 4, 2003, among our Company, The Great
Atlantic & Pacific Company of Canada, Limited and
the other Borrowers party hereto, as Borrowers,
and the Lenders party hereto, and JPMorgan Chase
Bank, as U.S. Administrative Agent and U.S.
Collateral Agent, and JPMorgan Chase Bank,
Toronto Branch, as Canadian Administrative Agent
and Canadian Collateral Agent (incorporated
herein by reference to Exhibit 10.25 to Form 10-Q
filed on January 9, 2004)
13* Fiscal 2003 Annual Report to Stockholders
14* Code of Business Conduct and Ethics
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* Consent of Independent Accountants from
PricewaterhouseCoopers LLP
31.1* Certification of the Chief Executive Officer
Pursuant Section 302 of the Sarbanes-Oxley Act
of 2002
31.2* Certification of the Chief Financial Officer
Pursuant Section 302 of the Sarbanes-Oxley Act
of 2002
32* Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
* Filed with this 10-K
(b) Reports on Form 8-K
On January 9, 2004, our Company filed a Form 8-K pursuant to which it
furnished the SEC with a copy of the January 9, 2004 press release, which
announced the Company's financial results for the quarter ended November 29,
2003.
On February 27, 2004, our Company filed a Form 8-K pursuant to which it
furnished the SEC with a copy of a February 27, 2004 press release, which
announced our Company's completion of a real estate sale leaseback transaction
with Cardinal Capital Partners, Inc. (Dallas, Texas), resulting in proceeds to
our Company of approximately $170 million.
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 21, 2004 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/ Jens-Jurgen Bockel Director
- ------------------------------------
Jens-Jurgen Bockel
/s/ Bobbie A. Gaunt Director
- ------------------------------------
Bobbie A. 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
21, 2004.
/s/ Brenda M. Galgano Vice President, Corporate Controller
- ------------------------------------
Brenda M. Galgano May 21, 2004
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>2
<FILENAME>b332049ex_13.txt
<DESCRIPTION>FISCAL 2003 ANNUAL REPORT TO STOCKHOLDERS
<TEXT>
<PAGE>
The Great Atlantic & Pacific Tea Company, Inc.
Fiscal 2003
Annual Report to Stockholders
Table of Contents
CEO Letter to Stockholders........................................... 3
Management's Discussion and Analysis................................. 6
Consolidated Statements of Operations................................ 42
Consolidated Statements of Stockholders' Equity
And Comprehensive (Loss) Income............................... 43
Consolidated Balance Sheets.................... ..................... 44
Consolidated Statements of Cash Flows................................ 45
Notes to Consolidated Financial Statements........................... 46
Management's Report on Consolidated Financial Statements ............ 90
Report of Independent Accountants.................................... 91
Five Year Summary of Selected Financial Data......................... 92
Executive Officers................................................... 94
Board of Directors................................................... 94
Stockholder Information.............................................. 95
Company Profile
The Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "our
Company"), based in Montvale, New Jersey, operates combination food and drug
stores, conventional supermarkets and limited assortment food stores in 10 U.S.
states, the District of Columbia and Ontario, Canada, under the A&P(R),
Waldbaum's(TM), Super Foodmart, The Food Emporium(R), Super Fresh(R), Farmer
Jack(R), Sav-A-Center(R), Dominion(R), Ultra Food & Drug, Food Basics(R) and
The Barn Markets(R) trade names.
<PAGE>
CEO LETTER TO STOCKHOLDERS
- --------------------------
To Our Stockholders:
Fiscal 2003 was a pivotal year of transition for A&P, in which we took
decisive actions to build a solid platform for the turnaround of our business.
Although we have not yet restored profitability, we took critical steps
toward that goal by restructuring our organization, improving our cost structure
and financial position, reversing the negative trend of our U.S. business and
maintaining the profitability of our Canadian operations.
The stabilization of the U.S. business following a serious decline the
previous year, and our continued profitability in Canada despite difficult
economic and competitive conditions, underlined the effectiveness of the new
operating structure and leadership we installed in the latter part of fiscal
2002.
In addition to empowering new and experienced operating leadership, our
establishment of the A&P U.S. and A&P Canada business units improved efficiency
by eliminating redundant positions and unnecessary operating layers. Combined
with our Company-wide focus on expense reduction, this resulted in a decrease of
administrative costs.
We strengthened our balance sheet and overall financial position in
fiscal 2003, generating approximately $425 million in proceeds through the
divestiture of non-strategic retail operations in northern New England and
Wisconsin and the Eight O'Clock Coffee business, and sale/leaseback transactions
involving Company properties. These difficult decisions were necessary to ensure
the Company's ongoing viability, and enable A&P U.S. management to focus
attention and resources on the turnaround of its retail businesses.
That focus, and a strong emphasis on operating and customer service
fundamentals, enabled A&P U.S. to halt the previous decline of its top and
bottom line results, and meet or exceed internal operating targets throughout
the year.
A specific priority in 2003 was the revitalization of the Farmer Jack
operations in Michigan and Ohio. Last June marked the relaunch of that banner
with heightened emphasis on fresh foods, customer service and better pricing,
and the addition of several new and remodeled stores. Customer response has been
enthusiastic, and results thus far are on track. Another key objective was the
fine-tuning of our discount Food Basics concept for expansion beyond our test
markets in metropolitan New York and Philadelphia. That process, completed in
2003, resulted in the successful opening of 10 Food Basics units in the Detroit
market on March 30, 2004.
The powerful consumer franchise and strong operations of A&P Canada
were tested in fiscal 2003, as the SARS outbreak, Mad Cow disease concern and
other events played havoc with Canada's tourism industry and overall economy for
most of the year. Despite those challenges, the Canadian Company delivered
another solid profit performance.
The refinement of our two-tier marketing offer in Ontario continued in
2003. Evolving mainstream stores emphasizing superior fresh and prepared food
offerings emerged under the Dominion and A&P banners; while the no frills Food
Basics stores, well established in Ontario over the past several years, further
sharpened their discount impact to meet competition. The customer appeal of
those formats, sound merchandising and operating execution and aggressive cost
management enabled us to succeed last year despite the turbulence of the Ontario
marketplace.
In summary, despite our poor results in absolute terms, we did achieve
all of our strategic objectives for fiscal 2003. Given our previous trend and
the nature of the economic and competitive landscape, we did not expect full
recovery within the year. Rather our aim was to lay the groundwork for
turnaround of the Company. That mission was successfully accomplished.
Going forward, our near-term expectations are conservative, due to the
considerable work still ahead of us in turning our business around and the
continued weakness of some leading economic indicators. However in terms of our
ultimate prospect for recovery, I remain confident for several reasons.
One is the fundamental operating improvement achieved across our U.S.
banners in fiscal 2003. Our positive comparable store sales trend underlined
vital progress not yet reflected on our bottom line, but clearly noted by our
customers. This was confirmed by the results of objective, third party shopper
surveys conducted in our stores all year, and also by our high customer ratings
in an independent shopper satisfaction study published by a national trade
journal, which included major competitors in most of our markets.
Secondly, last year's successful financial initiatives and operating
improvements will enable us to resume meaningful capital investment in the
business in 2004. This will accelerate the improvement of our store facilities,
and enable us to take advantage of unique opportunities, such as our recent
agreement to purchase four stores in New Orleans to expand our Sav-A-Center
operation.
Third is the developing impact of our supply chain and business process
infrastructure. This critical information platform will be instrumental in the
improvement of our distribution, category management, merchandising and store
operations. We anticipate substantial benefits as we fully utilize these
advanced tools to deliver the best possible offer to our customers, at the
lowest possible cost to the Company.
Last but certainly not least is the commitment and capability of our
people at all levels, demonstrated throughout the year even as we challenged
them with significant changes in the structure and scope of the organization.
A dramatic illustration was their exemplary performance during the
massive power blackout last August that affected the majority of our operations,
some for several days. Under those difficult circumstances, our people worked
diligently to maintain food safety, serve customer needs however possible, and
swiftly reestablish normal operations once power was restored.
More than any other factor, people are driving the recovery and renewal
of our business. Their commitment to our customers and our Company solidifies my
belief that A&P will persevere, and prevail. In closing, I salute all of our
associates for their dedication and hard work throughout fiscal 2003, and also
extend sincere thanks to our customers, suppliers and investors for their
continuing support.
Christian Haub
Chairman of The Board,
President & Chief Executive Officer
<PAGE>
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis
INTRODUCTION
- ------------
The following Management's Discussion and Analysis is intended to help
the reader understand the financial position, operating results, and cash flows
of The Great Atlantic and Pacific Tea Company, Inc. It should be read in
conjunction with our financial statements and the accompanying notes ("Notes").
It discusses matters that Management considers relevant to understanding the
business environment, financial position, results of operations and our
Company's liquidity and capital resources. These items are presented as follows:
o Basis of Presentation - a discussion of our Company's fiscal year-end.
o Overview -- a general description of our business; the value drivers of
our business; measurements; opportunities; challenges and risks; and
initiatives.
o 2004 Outlook -- a discussion of certain trends or business initiatives
for the upcoming year that Management wishes to share with the reader
to assist in understanding the business.
o Review of Operations and Liquidity and Capital Resources - a discussion
of results for fiscal 2003 and 2002, 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 2003 ended
February 28, 2004, fiscal 2002 ended February 22, 2003 and fiscal 2001 ended
February 23, 2002. Fiscal 2003 was comprised of 53 weeks, and fiscal 2002 and
fiscal 2001 were each comprised of 52 weeks. Except where noted, all amounts are
presented in millions, and all net income (loss) per share data presented is
both basic and diluted.
<PAGE>
OVERVIEW
- --------
The Great Atlantic & Pacific Tea Company, Inc., based in Montvale,
New Jersey, operates conventional supermarkets, combination food and drug
stores and discount food stores in 10 U.S. states, the District of Columbia, and
Ontario, Canada.
Our Company's business consists of retail grocery operations, which
include 633 directly managed stores and 63 franchised stores as of February 28,
2004. Operations are managed by two strategic business units ("SBUs") within the
Company, A&P U.S. and A&P Canada, which are supported by central corporate
functions. The chief executives of both SBUs, and the executives leading
corporate functions, report directly to the Chairman of the Board, President &
Chief Executive Officer of our Company.
o A&P U.S., based in Paterson, New Jersey, oversees all operations in the
United States. Our conventional operations include the A&P, Waldbaum's
and Food Emporium banners, which serve Metro New York, Super Fresh,
which serves Philadelphia and Baltimore, Farmer Jack, which serves the
greater Detroit area and Sav-A-Center, which serves the New Orleans
area. We also operate the Food Basics discount banner in several of our
areas. The stores are supported by eight regional distribution centers
located in the various markets in which we operate.
o A&P Canada, based in Toronto, Ontario, oversees operations across
Ontario, with stores operating under the A&P, Dominion, Food Basics,
Ultra Food & Drug and The Barn Market banners. A&P Canada also serves
as a franchisor to certain Food Basics stores in Ontario. The stores
are supported by four distribution centers.
Fiscal 2003 was a year of transition for our Company, as the first full year
operating under the current organizational structure, which was implemented in
the latter part of fiscal 2002. In addition to creating the two SBUs, we
installed new leadership in both units, positioned experienced operating
management closer to the retail businesses, and shifted selected support
functions from the Corporate organization into the business units.
Key initiatives were implemented during Fiscal 2003 along three major fronts:
1. Fortifying our Company's financial condition;
2. Halting the declining trend in our U.S. operations; and,
3. Strengthening our already-profitable Canadian operations.
Specific actions and outcomes were as follows:
o Fortifying our Company's financial condition: We generated
approximately $425 million in net cash proceeds during Fiscal 2003
through an asset divestiture program which led to the sale of store
operations in New England and Wisconsin and the Eight O'Clock Coffee
business as well as sale-leaseback transactions involving a number of
our properties. Financially, completing these sales enabled us to
reduce our debt burden and increase liquidity; managerially, they
enabled us to devote resources and attention to the businesses with the
best potential for profitable growth.
o In addition, we extended and amended our senior secured revolving
credit facility, putting in place a new $400 million facility to
provide an additional 2-1/2 years of term, until December 2007. The
amended facility also provides our Company with greater operating
flexibility, and makes possible increased capital spending which we
believe is a necessary part of our turnaround.
o Further, our Company-wide emphasis on cost reduction resulted in lower
overall administrative expenses as a percentage of sales. In addition
to heightened awareness and enforcement of cost control disciplines
throughout the organization, specific expense reduction measures
included a general administrative salary and hiring freeze in our
Corporate office and across the U.S. business, which remained in effect
throughout fiscal 2003.
o We also continued to develop and expand our Strategic Sourcing program.
This chainwide system for the purchase of supplies, equipment and
services needed to operate the business has generated approximately $40
million in savings to our Company over the past three years.
o Halting the decline in our US operations: The A&P U.S. business unit
made substantial progress in the effort to turn its operations around
and restore a profitable growth trend. Through tighter management of
results against budgeted targets, more disciplined merchandising and
promotional activity and heightened emphasis of store operating and
customer service fundamentals, management was able to stabilize the
business in the first half of fiscal 2003. The improvement trend built
steadily through the second half, resulting in comparable store sales
and operating profit results that exceeded internal targets for the
year.
o Two specific operating initiatives were afforded highest priority by
the U.S. business in fiscal 2003 - the turnaround of the Farmer Jack
operations in Michigan and Ohio, and preparation of the discount Food
Basics concept for expansion throughout the U.S. operating territories.
o Farmer Jack: In June of 2003, we relaunched Farmer Jack with a
new merchandising and marketing campaign emphasizing fresh foods,
customer service and better pricing. Those improvements have
begun to generate growth in sales and customer count, reversing
the previous decline of Farmer Jack's leading share of the
Detroit market. Thus far, results are consistent with
expectations, though we continue to have more progress to make to
restore a sufficient level of profitability.
o Food Basics: The Company's U.S. discount Food Basics format
continued to evolve last year, moving from test mode to the
beginning of a gradual roll-out in our operating territories. We
made changes in merchandising and product mix, daily store
operations and banner leadership to prepare for a growth-oriented
future. Food Basics, pioneered by our Company in Ontario several
years ago, has undergone extensive evaluation and refinement in
test locations in metropolitan New York and New Jersey and in
Philadelphia over the past two years. That process was completed
in fiscal 2003 and has since resulted in the successful opening
of 10 Food Basics units in the Detroit market on March 31, 2004.
o Other banners: Our other banners in the U.S. also stabilized during
Fiscal 2003. In particular, our Super Fresh banner maintained its
prior year trend of relatively rapid comparable store sales growth
and improved profit performance. We believe the performance of our
A&P, Waldbaum's and The Food Emporium banners will also provide a
solid base for improvement initiatives we plan for Fiscal 2004 and
beyond.
o During Fiscal 2003, A&P U.S. began to more fully use the capabilities
we built during the Supply Chain and Business Process initiative
which we completed in 2002. Our managers are now able to take better
advantage of advanced supply and logistics, category management,
merchandising and store operations tools and systems. Our Company is
now positioned to more fully leverage purchasing scale, drive
operating efficiency and enhance store product assortments throughout
the U.S. and Canada.
o Strengthening our already-profitable Canadian operations: A&P Canada
delivered a solid performance in fiscal 2003, despite the detrimental
impact of the SARS and Mad Cow Disease issues on Ontario's economy, and
the intense competitive environment that resulted. Our Company's
results were aided by management's response to these challenges, with
aggressive cost containment, and tight adherence to marketing and
merchandising strategies that produced profit without sacrificing
critical market share.
o Further, A&P Canada continued to refine and develop its marketing, by
further elevating the quality and appeal of its fresh and prepared food
offers, while also sharpening the low cost, discount Food Basics
stores. These activities provide a good base for maintaining
profitability in 2004, despite a continuing challenging competitive
environment. In particular, we continued to evolve our leading-edge
fresh store merchandising and product mix, in our Dominion, A&P and The
Barn Markets banners, and we made changes to our Food Basics stores and
merchandising program, already well established, to reflect the changed
environment.
<PAGE>
2004 OUTLOOK
- ------------
We believe that the financial and operating improvements we achieved in
Fiscal 2003 strengthen our potential to improve profitability in the face of a
difficult market environment. We have taken a conservative outlook with regard
to results in fiscal 2004, based on both external and internal factors.
Externally, despite some positive signs regarding the economy overall,
we remain concerned that the indicators that traditionally impact food
retailers, most notably employment and new job creation forecasts, in both the
U.S. and Canada, do not provide a basis for significant increases in consumer
optimism in the foreseeable future.
Internally, a primary consideration is the turnaround of the U.S.
business, which remains a work in progress. A return to profitability is our
chief objective, but we recognize that achieving that result requires long range
success of the Farmer Jack initiative, substantive improvements throughout all
the U.S. banner operations, and successful development of a sizeable Food Basics
offering. We expect, over the course of the year, that we will continue to see
sustained progress on each of these initiatives.
Moreover, as a catalyst for those improvements, our Company's strategic
plan calls for a substantially increased capital investment in the store network
compared to the level of recent years. Although this is a positive and
encouraging development made possible by last year's financial initiatives and
operating improvements, it nevertheless represents reinvestment in the business
that is likely to affect profitability and cash flow for several years.
Our Company's key focal points and objectives for fiscal 2004 are
parallel to those of Fiscal 2003, as follows:
o In the U.S., continue to strengthen each conventional banner, behind
stronger marketing, merchandising and store operations; and gradually
rollout the Food Basics discount banner;
o In Canada, enhance an already strong operating and market position; and
o Centrally, maintain our strong liquidity with continued focus on cash
flow generation and efficient support operations.
REVIEW OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------
Our consolidated financial information presents the income related to
our operations of discontinued businesses separate from the results of our
continuing operations. Both the discussion and analysis that follows focus on
continuing operations.
FISCAL 2003 COMPARED WITH FISCAL 2002
- -------------------------------------
OVERALL
- -------
Sales for fiscal 2003 were $10.8 billion, compared with $10.1 billion for
fiscal 2002; comparable store sales, which include stores that have been in
operation for two full fiscal years and replacement stores, increased 0.9%. Net
loss per share for fiscal 2003 was $3.82 compared to a net loss per share of
$5.03 for fiscal 2002, a decrease of $1.21 per share.
<TABLE>
<CAPTION>
Favorable /
Fiscal 2003 Fiscal 2002 (Unfavorable) % Change
--------------- --------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Sales $ 10,812.5 $ 10,096.8 $ 715.7 7.1%
Increase in same store sales 0.9% 0.4% NA NA
Loss from continuing
operations (211.3) (201.1) (10.2) (5.1)
Income from discontinued
operations 64.3 7.6 56.7 NM
Net loss (147.0) (193.5) 46.5 24.0
Net loss per share (3.82) (5.03) 1.21 24.1
NM = not meaningful
</TABLE>
Included in our results for fiscal 2003 was a $37.7 million charge ($0.98
per share) relating to our Farmer Jack restructuring program as described in
Notes 3 and 4 of our Consolidated Financial Statements, a $4.2 million net gain
($0.11 per share) relating to reversals of previously accrued vacancy related
costs as described in Note 4 of our Consolidated Financial Statements, and a
$60.1 million charge ($1.56 per share) relating to our Farmer Jack goodwill and
long-lived asset impairments as described in Note 3 of our Consolidated
Financial Statements.
<PAGE>
The following table details the adjustments from "as reported" to "as
adjusted" results for fiscal 2003:
<TABLE>
<CAPTION>
Fiscal 2003 Fiscal 2002
-------------------------------------------------------------------- ---------------
Adjustments to be
(added) subtracted
--------------------------------
Goodwill/
Fiscal 2003 Asset long-lived Fiscal 2003 Fiscal 2002
results as disposition asset results as results as
(In Millions) reported initiative impairment adjusted adjusted
---------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Sales $ 10,812.5 $ - $ - $ 10,812.5 $ 10,096.8
Cost of merchandise sold (7,882.7) (2.2) - (7,880.5) (7,250.0)
---------------- ---------------- --------------- ----------------- ------------
Gross margin 2,929.8 (2.2) - 2,932.0 2,846.8
Rate to sales 27.10% 27.12% 28.19%
Store operating, general and
administrative expense (3,098.3) (31.3) (60.1) (3,006.9) (2,860.8)
Rate to sales 28.65% 27.81% 28.33%
---------------- --------------- --------------- --------------- --------------
Loss from operations (168.5) (33.5) (60.1) (74.9) (14.0)
Interest expense (81.8) - - (81.8) (84.7)
Interest income 7.3 - - 7.3 7.9
---------------- --------------- --------------- --------------- --------------
Loss from continuing operations
before income taxes (243.0) (33.5) (60.1) (149.4) (90.8)
Benefit from income taxes 31.7 - - 31.7 0.6
---------------- --------------- --------------- --------------- --------------
Loss from continuing operations (211.3) (33.5) (60.1) (117.7) (90.2)
Discontinued operations:
(Loss) income from operations of
discontinued businesses, net of tax (30.2) - - (30.2) 7.6
Gain on disposal of discontinued
operations, net of tax 94.5 - - 94.5 -
---------------- --------------- --------------- --------------- --------------
Income from discontinued
operations 64.3 - - 64.3 7.6
---------------- --------------- --------------- ---------------- --------------
Net loss $ (147.0) $ (33.5) $ (60.1) $ (53.4) $ (82.6)
================ =============== =============== ================ ==============
</TABLE>
<PAGE>
The following table details the adjustments from "as reported" to
"as adjusted" results for fiscal 2002:
<TABLE>
<CAPTION>
Fiscal 2002
------------------------------------------------------------------------------------------
Adjustments to be (added) subtracted
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gain on
proceeds
from the
Gain on demutual-
Fiscal early Deferred ization Fiscal
2002 Asset extinguish- tax asset of a mutual 2002
results as disposition ment valuation insurance results as
(In Millions) reported initiative of debt allowance company adjusted
------------- ------------- ------------- ---------- ------------- -------------
Sales $ 10,096.8 $ - $ - $ - $ - $ 10,096.8
Cost of merchandise
sold (7,251.3) (1.3) - - - (7,250.0)
-------------- ------------- ------------- ---------- ------------ ---------------
Gross margin 2,845.5 (1.3) - - - 2,846.8
Rate to sales 28.18% 28.19%
Store operating, general
and administrative
expense (2,839.2) 7.7 12.2 - 1.7 (2,860.8)
Rate to sales 28.12% 28.33%
------------- ------------- ------------- ------------- ------------- --------------
Income (loss) from
operations 6.3 6.4 12.2 - 1.7 (14.0)
Interest expense (84.7) - - - - (84.7)
Interest income 7.9 - - - - 7.9
------------- ------------- ------------- ------------- ------------- --------------
(Loss) income from
continuing operations
before income
taxes (70.5) 6.4 12.2 - 1.7 (90.8)
(Provision for) benefit
from income taxes (130.6) 3.2 0.3 (134.0) (0.7) 0.6
--------------- ----------- ------------- ------------ ------------- -------------
(Loss) income from
continuing
operations (201.1) 9.6 12.5 (134.0) 1.0 (90.2)
Discontinued operations:
Income from operations
of discontinued
businesses, net of tax 7.6 - - - - 7.6
Gain on disposal of
discontinued
operations, net of tax - - - - - -
------------- ------------- ------------- ------------- ------------- -------------
Income from
discontinued
operations 7.6 - - - - 7.6
------------- ------------- ------------- ------------- ------------- -------------
Net loss $ (193.5) $9.6 $12.5 $(134.0) $ 1.0 $ (82.6)
============= ============= ============= ============= ============= ==============
</TABLE>
<PAGE>
SALES
- -----
Sales for fiscal 2003 of $10.8 billion increased $715.7 million or 7.1%
from sales of $10.1 billion for fiscal 2002. The higher sales were due to an
increase in U.S. Retail sales of $136.0 million, an increase in Canada Retail
sales of $478.4 million, and an increase in Canada Wholesale sales of $101.3
million. The increase in Canadian sales was primarily due to the favorable
impact of the Canadian exchange rate. The following table presents sales for
each of our operating segments for fiscal 2003 and fiscal 2002:
<TABLE>
<CAPTION>
Fiscal 2003 Fiscal 2002 Inc (Dec) % Change
----------------- ----------------- -------------------- ----------------
<S> <C> <C> <C> <C>
U.S. Retail $ 7,563.0 $ 7,427.0 $ 136.0 1.8%
Canada Retail 2,435.7 1,957.3 478.4 24.4
Canada Wholesale 813.8 712.5 101.3 14.2
----------------- ----------------- -------------------- ----------------
Total $ 10,812.5 $ 10,096.8 $ 715.7 7.1%
================= ================= ==================== ================
</TABLE>
The following details the dollar impact of several items affecting the
increase in sales by operating segment from fiscal 2002 to fiscal 2003:
<TABLE>
<CAPTION>
Impact of Impact of Foreign Comparable Impact of
New Closed Exchange Sales Store 53rd
Stores Stores Rate Volume Sales Week Total
------------- ------------- -------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Retail $ 51.9 $ (83.2) $ - $ - $ 34.7 $ 132.6 $ 136.0
Canada Retail 106.5 (28.7) 305.5 - 48.2 46.9 478.4
Canada Wholesale - - 100.8 (14.8) - 15.3 101.3
------------- ------------- -------------- ------------- ------------- ------------- ---------
Total $ 158.4 $ (111.9) $ 406.3 $ (14.8) $ 82.9 $ 194.8 $715.7
============= ============= ============== ============= ============= ============= ==========
</TABLE>
The increase in U.S. Retail sales was primarily attributable to the opening
of 28 stores since the beginning of fiscal 2002, of which 10 were opened in
fiscal 2003, increasing sales by $51.9 million, the increase in comparable store
sales for fiscal 2003 on a 52 week basis of 0.5% as compared to fiscal 2002, and
the favorable impact of the 53rd week included in fiscal 2003 which increased
sales by $132.6 million. These increases were partially offset by the closure or
sale of 108 stores since the beginning of 2002, of which 75 were closed or sold
in 2003, decreasing sales by $83.2 million. Included in the 108 stores closed or
sold since the beginning of fiscal 2002 were 21 stores closed as part of the
asset disposition initiative as discussed in Note 4 of our Consolidated
Financial Statements.
The increase in Canada Retail sales was primarily attributable to the
opening or transfer from franchise operations of 22 stores since the beginning
of fiscal 2002, of which 9 were opened in fiscal 2003, increasing sales by
$106.5 million, the favorable effect of the Canadian exchange rate, which
increased sales by $305.5 million, the increase in comparable store sales for
fiscal 2003 on a 52 week basis of 2.0% as compared to fiscal 2002, and the
favorable impact of the 53rd week included in fiscal 2003 which increased sales
by $46.9 million. These increases were partially offset by the closure of 19
stores since the beginning of 2002, of which 10 were closed in 2003, decreasing
sales by $28.7 million.
The increase in Canada Wholesale sales was attributable to the favorable
effect of the Canadian exchange rate of $100.8 million and the favorable impact
of the 53rd week included in fiscal 2003, which increased sales by $15.3
million, partially offset by lower sales volume of $14.8 million as we converted
several stores from franchise to corporate operations.
Average weekly sales per supermarket for U.S. Retail were approximately
$332,100 for fiscal 2003 versus $320,500 for the corresponding period of the
prior year, an increase of 3.6% due primarily to higher comparable store sales.
Average weekly sales per supermarket for Canada Retail were approximately
$259,600 for fiscal 2003 versus $222,000 for the corresponding period of the
prior year, an increase of 16.9%. This increase was primarily due to the
increase in the Canadian exchange rate and higher comparable store sales.
GROSS MARGIN
- ------------
The following table presents gross margin dollar results and gross margin
as a percentage of sales by operating segment for fiscal 2003 as compared to
fiscal 2002. Gross margin as a percentage of sales decreased 108 basis points to
27.10% for fiscal 2003 from 28.18% for fiscal 2002. This 108 basis point
decrease was caused by continued competitive pressures to drive sales volume and
protect market share in the current market.
<TABLE>
<CAPTION>
Fiscal 2003 Fiscal 2002
-------------------------------------------- --------------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
U.S. Retail $ 2,256.3 29.83% $ 2,268.9 30.55%
Canada Retail 658.6 27.04 559.2 28.57
Canada Wholesale 14.9 1.83 17.4 2.44
-------------- --------------- -------------- --------------
Total $ 2,929.8 27.10% $ 2,845.5 28.18%
============== =============== ============== ==============
</TABLE>
The following table details the dollar impact of several items affecting
the gross margin dollar increase by operating segment from fiscal 2002 to
fiscal 2003:
<TABLE>
<CAPTION>
Sales Volume Gross Margin Rate Exchange Rate Total
------------ ----------------- ------------- --------------
<S> <C> <C> <C> <C>
U.S. Retail $ 41.5 $ (54.1) $ - $ (12.6)
Canada Retail 49.4 (32.3) 82.3 99.4
Canada Wholesale - (4.3) 1.8 (2.5)
------------ ------------------ --------------- -------------
Total $ 90.9 $ (90.7) $ 84.1 $ 84.3
============ ================== =============== =============
</TABLE>
The U.S. Retail gross margin decrease of $12.6 million resulted from a
decrease of $54.1 million due to a lower gross margin rate partially offset by
an increase of $41.5 million due to higher sales volume. The Canadian Retail
gross margin increase of $99.4 million resulted from increases of $49.4 million
due to higher sales volume and $82.3 million from fluctuations in the Canadian
exchange rate, partially offset by a decrease of $32.3 million due to a lower
gross margin rate. The Canadian Wholesale gross margin decrease of $2.5 million
resulted from a decrease of $4.3 million due to a lower gross margin rate
partially offset by $1.8 million from fluctuations in the Canadian exchange
rate.
Included in our U.S. Retail gross margin for fiscal 2003 and fiscal 2002
were costs related to our asset disposition initiative of $2.2 million and $1.3
million, respectively, which were incurred to mark down inventory in stores
announced for closure.
<PAGE>
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
The following table presents store operating, general and administrative
expense ("SG&A"), by operating segment, in dollars and as a percentage of sales
for fiscal 2003 compared to fiscal 2002. SG&A expense was $3.1 billion or 28.65%
for fiscal 2003 as compared to $2.8 billion or 28.12% for fiscal 2002.
<TABLE>
<CAPTION>
Fiscal 2003 Fiscal 2002
-------------------------------------------- --------------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------------------ ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
U.S. Retail $ 2,453.9 32.45% $ 2,329.5 31.37%
Canada Retail 654.0 26.85 522.7 26.71
Canada Wholesale (9.6) (1.18) (13.0) (1.83)
------------- --------------- ------------- --------------
Total $ 3,098.3 28.65% $ 2,839.2 28.12%
============ =============== ============ ==============
</TABLE>
Included in SG&A for fiscal 2003 was a $35.5 million charge relating to
our Farmer Jack restructuring program as described in Note 4 of our Consolidated
Financial Statements, a $4.2 million net gain relating to reversals of
previously accrued vacancy related costs as described in Note 4 of our
Consolidated Financial Statements, and a $60.1 million charge relating to our
Farmer Jack goodwill and long-lived asset impairments as described in Note 3 of
our Consolidated Financial Statements. In addition, included in SG&A for fiscal
2002 were net gains of $7.7 million relating to our asset disposition initiative
as described in Note 2 of our Consolidated Financial Statements included in our
Fiscal 2002 Annual Report to Stockholders, a gain of $12.2 million relating to
the early extinguishment of $50.7 million of our 7.75% Notes due April 15, 2007
and $44.5 million of our 9.125% Notes due December 15, 2011 as described in Note
6 of our Consolidated Financial Statements included in our Fiscal 2002 Annual
Report to Stockholders, and 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
included in our Fiscal 2002 Annual Report to Stockholders. Excluding these
charges, SG&A as a percentage of sales for fiscal 2003 as compared to fiscal
2002 would have decreased 52 basis points.
The major items impacting this decrease in SG&A as a percentage of sales
include:
o Higher mix of sales in Canada which has a lower SG&A rate;
o Lower costs related to our business process initiative; and
o Lower severance and employee buy-out costs in the U.S.
Partially offset by a $17.5 million increase in our workers' compensation and
general liability reserves in response to both adverse development of prior
years' costs and other developments including a continuing trend of rising
costs.
Also included in SG&A for fiscal 2002 were $60.5 million 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.
We also review individual assets in stores planned for closure or
conversion for impairment upon determination that such assets will not be used
for their intended useful life. During fiscal 2003 and fiscal 2002, we recorded
impairment losses on property, plant and equipment of $4.4 million and $15.7
million, respectively, related to U.S. Retail stores that were or will be closed
in the normal course of business. Similarly, we recorded impairment losses on
property, plant and equipment of $1.7 million and $3.2 million, respectively,
related to Canada Retail stores that were or will be closed in the normal course
of business. These amounts were included in SG&A in our Consolidated Statements
of Operations. If current operating levels and trends continue, there may be
additional future impairments on long lived assets, including the potential for
impairment of assets that are held and used.
<PAGE>
INTEREST EXPENSE
- ----------------
Interest expense of $81.8 million for fiscal 2003 decreased from the
prior year amount of $84.7 million due primarily to lower interest expense
resulting from our open market purchase of $50.7 million of our 7.75% Notes due
April 15, 2007 and $44.5 million of our 9.125% Notes due December 15, 2011,
primarily during the fourth quarter of fiscal 2002.
INCOME TAXES
- ------------
The benefit from income taxes from continuing operations for fiscal 2003
was $31.7 million (a $42.3 million benefit from our U.S. operations and a $10.6
million provision for our Canadian operations) compared to $130.6 million
provision for income taxes from continuing operations for fiscal 2002 (a $104.6
million provision for our U.S. operations and a $26.0 million provision for our
Canadian operations). Our U.S. tax benefit from continuing operations was offset
by a tax provision provided on discontinued operations in accordance with
Statement of Financial Accounting Standards 109, "Accounting for Income Taxes".
Consistent with prior year, we continue to record a valuation allowance against
our U.S. net deferred tax assets.
(LOSS) INCOME FROM OPERATIONS OF DISCONTINUED BUSINESSES, NET OF TAX
- --------------------------------------------------------------------
Beginning in the fourth quarter of fiscal year 2002 and in the early part
of the first quarter of fiscal 2003, we decided to sell our operations located
in Northern New England and Wisconsin, as well as our Eight O'Clock Coffee
business. These asset sales are now complete.
Loss from operations of discontinued businesses, net of tax, for fiscal
2003 was $30.2 million as compared to income from operations of discontinued
businesses, net of tax, of $7.6 million for fiscal 2002. During fiscal 2003, we
recorded the following pretax items related to these discontinued businesses:
o impairment losses on the property, plant and equipment relating to these
operations of $18.9 million;
o pension expense relating to early withdrawal from various multi-employer
union pension plans we participate in of $6.5 million;
o net rent vacancy charges of $23.6 million;
o severance charges of $5.8 million; and
o inventory markdowns of $1.4 million.
The remaining amounts for each period represent the operating results of
the stores in these locations as well as results from our Eight O'Clock Coffee
business.
<PAGE>
FISCAL 2002 COMPARED WITH FISCAL 2001
- -------------------------------------
OVERALL
- -------
Sales for fiscal 2002 were $10.1 billion, compared with $10.2 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, an increase of $3.15 per share.
<TABLE>
<CAPTION>
Favorable /
Fiscal 2002 Fiscal 2001 (Unfavorable) % Change
--------------- --------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Sales $ 10,096.8 $ 10,206.2 $ (109.4) (1.1)%
Increase in same store sales 0.4% 2.6% NA NA
Loss from continuing
operations (201.1) (83.4) (117.7) (141.1)
Income from discontinued
operations 7.6 11.5 (3.9) (33.9)
Net loss (193.5) (71.9) (121.6) (169.1)
Net loss per share (5.03) (1.88) (3.15) (167.6)
</TABLE>
Included in the results for fiscal 2002 was a pretax $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 included in our
Fiscal 2002 Annual Report to Stockholders), a pretax gain of $12.2 million
($12.5 million after tax or $0.32 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 (see Note 6 of our Consolidated Financial Statements
included in our Fiscal 2002 Annual Report to Stockholders), a $134.0 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
included in our Fiscal 2002 Annual Report to Stockholders), 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 included in our Fiscal 2002 Annual Report to
Stockholders). The following table details the adjustments from "as reported" to
"as adjusted" results for fiscal 2002:
<PAGE>
<TABLE>
<CAPTION>
Fiscal 2002 Fiscal 2001
------------------------------------------------------------------------------------------ ------------
Adjustments to be (added) subtracted
--------------------------------------------------------------
Gain on proceeds
Gain on from the
Fiscal early Deferred demutualization Fiscal Fiscal
2002 Asset extinguish- tax asset of a mutual 2002 2001
results as disposition ment valuation insurance results as results as
(In Millions) reported initiative of debt allowance company adjusted adjusted
------------- ------------- ------------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $ 10,096.8 $ - $ - $ - $ - $ 10,096.8 $10,206.2
Cost of merchandise
sold (7,251.3) (1.3) - - - (7,250.0) (7,284.7)
------------- ------------- ------------- ------------- ------------- ------------- ------------
Gross margin 2,845.5 (1.3) - - - 2,846.8 2,921.5
Rate to sales 28.18% 28.19% 28.62%
Store operating,
general and
administrative
expense (2,839.2) 7.7 12.2 - 1.7 (2,860.8) (2,832.0)
Rate to sales 28.12% 28.33% 27.75%
------------- ------------- ------------- ------------- ------------- ------------- ------------
Income (loss) from
operations 6.3 6.4 12.2 - 1.7 (14.0) 89.5
Interest expense (84.7) - - - - (84.7) (91.7)
Interest income 7.9 - - - - 7.9 7.0
------------- ------------- ------------- ------------- ------------- ------------- ------------
(Loss) income from
continuing
operations before
income taxes (70.5) 6.4 12.2 - 1.7 (90.8) 4.8
(Provision for) benefit
from income taxes (130.6) 3.2 0.3 (134.0) (0.7) 0.6 (3.8)
------------- ------------- ------------- ------------- ------------ ------------- -----------
(Loss) income from
continuing
operations (201.1) 9.6 12.5 (134.0) 1.0 (90.2) 1.0
Discontinued operations:
Income from operations
of discontinued
businesses, net of tax 7.6 - - - - 7.6 11.5
Gain on disposal of
discontinued
operations, net of tax - - - - - - -
------------- ------------- ------------- ------------- ------------- ------------- -------------
Income from discontinued
operations 7.6 - - - - 7.6 11.5
------------- ------------- ------------- ------------- ------------- ------------- ------------
Net loss $ (193.5) $ 9.6 $ 12.5 $ (134.0) $ 1.0 $ (82.6) $ 12.5
============= ============= ============= ============= ============= ============= ==========
</TABLE>
The following table details the adjustments from "as reported" to "as
adjusted" results for fiscal 2001:
<TABLE>
<CAPTION>
<PAGE>
Fiscal 2001
----------------------------------------------------------------------------
Adjustments to be (added) subtracted
------------------------------------------
Gain on
proceeds
from the
Loss on demutual-
early ization
Fiscal 2001 Asset extinguish- of a mutual Fiscal 2001
results as disposition ment insurance results as
(In Millions) reported initiative of debt company adjusted
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sales $ 10,206.2 $ - $ - $ - $ 10,206.2
Cost of merchandise sold (7,288.6) (3.9) - - (7,284.7)
--------------- ------------ ------------- ------------- -------------
Gross margin 2,917.6 (3.9) - - 2,921.5
Rate to sales 28.59% 28.62%
Store operating, general and
administrative expense (3,034.0) (189.6) (12.4) - (2,832.0)
Rate to sales 29.73% 27.75%
Gain on proceeds from the
demutualization of a
mutual insurance company 60.6 - - 60.6 -
--------------- ------------ ------------ ------------ -------------
(Loss) income from operations (55.8) (193.5) (12.4) 60.6 89.5
Interest expense (91.7) - - - (91.7)
Interest income 7.0 - - - 7.0
------------- ------------- ------------- ------------- -------------
(Loss) income from continuing
operations before income
taxes (140.5) (193.5) (12.4) 60.6 4.8
Benefit from (provision for)
income taxes 57.1 81.2 5.2 (25.5) (3.8)
------------- ----------- ------------- ------------- -------------
(Loss) income from
continuing operations (83.4) (112.3) (7.2) 35.1 1.0
Discontinued operations:
Income from operations of
discontinued businesses,
net of tax 11.5 - - - 11.5
Gain on disposal of discontinued
operations, net of tax - - - - -
------------- ------------- ------------- ------------- -------------
Income from discontinued
operations 11.5 - - - 11.5
------------- ------------- ------------- ------------- -------------
Net loss $ (71.9) $ (112.3) $ (7.2) $ 35.1 $ 12.5
============= ============= ============= ============= =============
</TABLE>
<PAGE>
SALES
- -----
Sales for fiscal 2002 of $10.1 billion decreased $109.4 million or 1.1%
from sales of $10.2 billion for fiscal 2001. The lower sales were due to a
decrease in U.S. Retail sales of $296.0 million, partially offset by increases
in Canada Retail sales of $150.6 million and in Canada Wholesale sales of $36.0
million. The following table presents sales for each of our operating segments
for fiscal 2002 and fiscal 2001:
<TABLE>
<CAPTION>
Fiscal 2002 Fiscal 2001 Inc (Dec) % Change
---------------- ----------------- -------------------- ----------------
<S> <C> <C> <C> <C>
U.S. Retail $ 7,427.0 $ 7,723.0 $ (296.0) (3.8)%
Canada Retail 1,957.3 1,806.7 150.6 8.3
Canada Wholesale 712.5 676.5 36.0 5.3
---------------- ----------------- -------------------- ----------------
Total $ 10,096.8 $ 10,206.2 $ (109.4) (1.1)%
================ ================= ==================== ================
</TABLE>
The following table details the dollar impact of several items affecting
the decrease in sales by operating segment from fiscal 2001 to fiscal 2002:
<TABLE>
<CAPTION>
Impact of Impact of Foreign Comparable
New Closed Exchange Sales Store
Stores Stores Rate Volume Sales Total
------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Retail $ 83.6 $ (334.3) $ - $ - $ (45.3) $ (296.0)
Canada Retail 100.5 (46.7) 2.5 - 94.3 150.6
Canada Wholesale - - 0.9 35.1 - 36.0
------------- -------------- ------------- ------------- ------------- -------------
Total $ 184.1 $ (381.0) $ 3.4 $ 35.1 $ 49.0 $ (109.4)
============= ============== ============= ============= ============= =============
</TABLE>
The decrease in U.S. Retail sales was primarily attributable to the
closure of 94 stores since the beginning of fiscal 2001, of which 33 were closed
in fiscal 2002, decreasing sales by $334.3 million, and lower comparable store
sales for fiscal 2002 of 1.0% as compared to fiscal 2001. Included in the 94
stores closed since the beginning of fiscal 2001 were 37 stores closed as part
of the asset disposition initiative discussed in Note 2 of our Consolidated
Financial Statements included in our Fiscal 2002 Annual Report to Stockholders.
This decrease was partially offset by the opening of 36 new stores since the
beginning of fiscal 2001, of which 18 were opened in fiscal 2002, increasing
sales by $83.6 million.
The increase in Canada Retail sales was primarily attributable to the
opening of 16 stores since the beginning of fiscal 2001, of which 13 were opened
in fiscal 2002, which increased sales by $100.5 million, the favorable effect of
the Canadian exchange rate, which increased sales by $2.5 million, and an
increase in comparable store sales for fiscal 2002 of 6.6% as compared to fiscal
2001. These increases were partially offset by the closure of 20 stores since
the beginning of fiscal 2001, of which 9 stores were closed in fiscal 2002,
decreasing sales by $46.7 million.
The increase in Canada Wholesale sales of $36.0 million was attributable
to higher sales volume of $35.1 million and the favorable effect of the Canadian
exchange rate of $0.9 million.
Average weekly sales per supermarket for U.S. Retail were approximately
$320,500 for fiscal 2002 versus $312,600 for the corresponding period of the
prior year, an increase of 2.5%. Average weekly sales per supermarket for Canada
Retail were approximately $222,000 for fiscal 2002 versus $200,400 for the
corresponding period of the prior year, an increase of 10.8%. These increases
were 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
- ------------
The following table presents gross margin dollar results and gross margin
as a percentage of sales by operating segment for fiscal 2002 as compared to
fiscal 2001. Gross margin as a percentage of sales decreased 41 basis points to
28.18% for fiscal 2002 from 28.59% for fiscal 2001.
<TABLE>
<CAPTION>
Fiscal 2002 Fiscal 2001
-------------------------------------------- --------------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
U.S. Retail $ 2,268.9 30.55% $ 2,364.5 30.62%
Canada Retail 559.2 28.57 537.7 29.76
Canada Wholesale 17.4 2.44 15.4 2.28
-------------- --------------- ------------ --------------
Total $ 2,845.5 28.18% $ 2,917.6 28.59%
============== ================ ============ ==============
</TABLE>
The following details the dollar impact of several items affecting the
gross margin dollar decrease by operating segment from fiscal 2001 to fiscal
2002.
<TABLE>
<CAPTION>
Sales Volume Gross Margin Rate Exchange Rate Total
------------ ----------------- ------------- ------------------
<S> <C> <C> <C> <C>
U.S. Retail $ (90.6) $ (4.9) $ - $ (95.5)
Canada Retail 44.1 (23.3) 0.7 21.5
Canada Wholesale 0.8 1.1 - 1.9
------------- -------------------- --------------- -------------
Total $ (45.7) $ (27.1) $ 0.7 $ (72.1)
============= ==================== =============== =============
</TABLE>
The U.S. Retail gross margin decrease of $95.5 million resulted from
decreases of $90.6 million due to lower sales volume and $4.9 million due to a
lower gross margin rate. The Canadian Retail gross margin increase of $21.5
million resulted from increases of $44.1 million in sales volume and $0.7
million from fluctuations in the Canadian exchange rate, partially offset by a
decrease of $23.3 million due to a lower gross margin rate. The Canadian
Wholesale gross margin increase of $1.9 million resulted from an increase of
$1.1 million due to a higher gross margin rate and an increase in sales volume
of $0.8 million.
This 41 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 fiscal 2001 were costs
related to our asset disposition initiative of $1.3 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
- ---------------------------------------------------
The following table presents SG&A, by operating segment, in dollars and as
a percentage of sales for fiscal 2002 as compared to fiscal 2001. SG&A was $2.8
billion or 28.12% for fiscal 2002 compared to $3.0 billion or 29.73% for fiscal
2001.
<TABLE>
<CAPTION>
Fiscal 2002 Fiscal 2001
-------------------------------------------- --------------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------------------ ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
U.S. Retail $ 2,329.5 31.37% $ 2,528.7 32.74%
Canada Retail 522.7 26.71 516.4 28.58
Canada Wholesale (13.0) (1.83) (11.1) (1.65)
------------- --------------- ------------- --------------
Total $ 2,839.2 28.12% $ 3,034.0 29.73%
============= =============== ============= ==============
</TABLE>
Included in SG&A for fiscal 2002 and fiscal 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 included in our Fiscal 2002 Annual Report to Stockholders. Also
included in SG&A for fiscal 2002 and fiscal 2001 was a gain of $12.2 million
relating to the early extinguishment of $50.7 million of our 7.75% Notes due
April 15, 2007 and $44.5 million of our 9.125% Notes due December 15, 2011 and a
loss of $12.4 million relating to the early extinguishment of $20.0 million of
our 7.75% Notes due April 15, 2007, respectively, as described in Note 6 of our
Consolidated Financial Statements included in our Fiscal 2002 Annual Report to
Stockholders, and a gain of $1.7 million in fiscal 2002 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
included in our Fiscal 2002 Annual Report to Stockholders. Excluding these
items, SG&A as a percentage of sales for fiscal 2002 as compared to fiscal 2001
would have increased 58 basis points.
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:
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 fiscal 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.
We also review individual assets in stores planned for closure or
conversion for impairment upon determination that such assets will not be used
for their intended useful life. During fiscal 2002, we recorded impairment
losses on property, plant and equipment of $15.7 million related to U.S. Retail
stores that were or will be closed in the normal course of business. Similarly,
we recorded impairment losses on property, plant and equipment of $3.2 million
related to Canada Retail stores that were or will be closed in the normal course
of business. During fiscal 2001, there were $91.4 million in impairment losses
relating to U.S. Retail stores, of which $80.9 million relates to the asset
disposition initiative as discussed in Note 2 of our Consolidated Financial
Statements included in our Fiscal 2002 Annual Report to Stockholders, and $5.0
million in impairment losses relating to Canada Retail stores closed in the
normal course of business. These amounts were included in SG&A in our
Consolidated Statements of Operations.
GAIN ON PROCEEDS FROM THE DEMUTUALIZATION OF A MUTUAL INSURANCE COMPANY
- -----------------------------------------------------------------------
During fiscal 2001, we received cash and common stock totaling $60.6
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 $84.7 million for fiscal 2002 decreased from the
prior year amount of $91.7 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:
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 included in our Fiscal 2002 Annual Report to Stockholders.
INCOME TAXES
- ------------
The provision for income taxes from continuing operations for fiscal 2002
was $130.6 million (a $104.6 million provision from our U.S. operations and a
$26.0 million provision for our Canadian operations) compared to a benefit from
income taxes from continuing operations of $57.1 million in fiscal 2001 (a $77.2
million benefit from our U.S. operations and a $20.1 million provision for our
Canadian operations). The change in the provision for income taxes relates to
the absence of the tax benefit 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 $27.8
million. Statement of Financial Accounting Standards ("SFAS") 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 included in our Fiscal 2002 Annual Report to Stockholders).
INCOME FROM OPERATIONS OF DISCONTINUED BUSINESSES, NET OF TAX
- -------------------------------------------------------------
Beginning in the fourth quarter of fiscal year 2002 and in the early part
of the first quarter of fiscal 2003, we decided to sell our operations located
in Northern New England and Wisconsin, as well as our Eight O'Clock Coffee
business. These asset sales are now complete.
Income from operations of discontinued businesses, net of tax for fiscal
2002 was $7.6 million as compared to $11.5 million for fiscal 2001. These
amounts for each fiscal year represent the operating results of the stores in
these locations as well as results from our Eight O'Clock Coffee business.
ASSET DISPOSITION INITIATIVE
- ----------------------------
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