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The Great Atlantic & Pacific Tea Company, Inc.
Comparative Highlights
(Dollars in thousands, except per share amounts,
financial ratios and store data)
52 Weeks Ended
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Feb. 24, 2001 Feb. 26, 2000 Feb. 27, 1999
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Sales $10,622,866 $10,151,334 $10,179,358
Income (loss) from
operations 50,193 104,830 (164,391)
Net (loss) income (25,068) 14,160 (67,164)
Net (loss) income per
share - basic and
diluted (0.65) 0.37 (1.75)
Cash dividends per share 0.30 0.40 0.40
Expenditures for property 415,842 479,572 438,345
Depreciation and
amortization 255,771 232,712 233,663
Working capital 94,370 98,305 109,047
Stockholders' equity 797,297 846,192 837,257
Debt to total
capitalization 57% 54% 51%
Book value per share 20.79 22.07 21.87
New store openings 47 54 46
Number of stores at year end 752 750 839
Number of franchised stores
served at year end 68 65 55
NOTE: Reference should be made to the "Management's Discussion and Analysis"
section contained herein for details of non-recurring charges recorded in each
of the fiscal years.
Company Profile
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The Great Atlantic & Pacific Tea Company, Inc. ("the Company"), based in
Montvale, New Jersey, operates combination food and drug stores, conventional
supermarkets and limited assortment food stores in 16 U.S. states, the District
of Columbia and Ontario, Canada, under the A&P, Waldbaum's, Super Foodmart, Food
Emporium, Super Fresh, Farmer Jack, Kohl's, Sav-A-Center, Dominion, Ultra Food &
Drug, Food Basics and The Barn Markets trade names. As of the fiscal year ended
February 24, 2001, the Company operated 752 stores and served 68 franchised
stores. Through its Compass Foods Division, the Company also manufactures and
distributes a line of whole bean coffees under the Eight O'Clock, Bokar and
Royale labels, both for sale through its own stores as well as other food and
convenience retailers.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis
OPERATING RESULTS
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Fiscal 2000 Compared with 1999
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Sales for the 52 weeks ended February 24, 2001 of $10.6 billion increased
$471.5 million or 4.6% from the prior year. The increase in sales is primarily
attributable to continued focus on the development of larger stores and
comparable store sales increases. Retail square footage increased by
approximately 1.0 million or 3.8% to 27.9 million square feet during fiscal
2000. This increase was accomplished primarily by opening 47 new stores adding
2.2 million retail square feet partially offset by closing 49 stores, reducing
retail square footage by 1.4 million. Comparable store sales, which include
replacement stores, increased 2.2% in fiscal 2000 (1.6% in the U.S. and 4.9% in
Canada).
Average weekly sales per supermarket were approximately $263,000 for the 52
week period of fiscal 2000 versus $245,700 for the corresponding period of the
prior year, an increase of 7.0%. Sales in the U.S. increased by $266.1 million
or 3.3% compared to fiscal 1999. Sales in Canada increased $205.4 million or
9.5% from fiscal 1999.
Gross margin as a percentage of sales decreased 13 basis points to 28.51%
for the 52 week period of fiscal 2000 from 28.64% for the 52 week period of
fiscal 1999. The gross margin dollar increase of $120.8 million resulted from an
increase in sales volume partially offset by decreases in the gross margin rate
and the Canadian exchange rate. The U.S. operations gross margin increase of
$92.5 million resulted from increases of $80.4 million due to higher sales
volume and $12.1 million due to a higher gross margin rate. The Canadian
operations gross margin increase of $28.3 million resulted from an increase of
$54.1 million due to higher sales volume partially offset by a decrease of $18.9
million due to a lower gross margin rate and a decrease of $6.9 million from
fluctuations in the Canadian exchange rate.
Store operating, general and administrative expense ("SG&A") was $3.0
billion for the 52 week period of fiscal 2000 compared to $2.8 billion for the
corresponding period of the prior year. As a percentage of sales, SG&A increased
from 27.61% in fiscal 1999 to 28.04% in fiscal 2000.
The SG&A expense for the 52 week period of fiscal 2000 included $68.4
million relating to the Great Renewal - Phase II supply chain and business
process initiative ("GR II"). Such costs primarily included professional
consulting fees and salaries, including related benefits, of employees working
full-time on the initiative. Also included in fiscal 2000 SG&A was $4.3 million
of estimated environmental clean up costs for a non-retail property. Partially
offsetting fiscal 2000 SG&A was a reversal of $3.1 million of charges related to
the Great Renewal - Phase I store closure initiative ("GR I") originally
recorded in fiscal 1998, resulting primarily from a change in estimate related
to the sale of a warehouse sold during the first quarter of fiscal 2000.
The SG&A expense for the 52 week period of fiscal 1999 included $121.5
million relating to GR I, including $74.6 million of costs related to the store
exiting charges and $68.8 million of store operating, general and administrative
expense incurred by the stores identified for closure prior to ceasing
operations. This was partially offset by reversals of previously recorded
restructuring charges due to favorable progress in marketing and subleasing the
closed stores of $21.9 million.
Excluding the non-recurring charges and the results of the stores
identified for closure previously noted, as a percentage of sales, SG&A
increased from 26.83% for the 52 week period of fiscal 1999 to 27.38% for the 52
week period of fiscal 2000. The increase of 55 basis points is primarily due to
higher labor, occupancy and store closing costs in fiscal 2000.
Interest expense for fiscal 2000 increased $12.0 million or 14.3% from
fiscal 1999 due to the increase in average borrowings, as well as an increase in
interest rates primarily associated with the 9.375% Senior Quarterly Interest
Bonds issued in August, 1999.
The loss before income taxes for the 52 week period of fiscal 2000 was
$39.7 million compared to income before income taxes of $27.0 million for the
comparable period in the prior year, a decrease of $66.7 million. The loss is
attributable principally to the increases in SG&A and interest expense partially
offset by higher gross margin.
The income tax benefit/provision recorded in fiscal 2000 and 1999 reflect
the estimated expected annual tax rates applied to its respective domestic and
foreign financial results. In fiscal 2000, an income tax benefit amounting to
$14.6 million was recorded as compared to an income tax provision of $12.8
million for fiscal 1999. The effective tax rates for fiscal 2000 and 1999 were
36.8% and 47.6%, respectively.
Based on these overall results, the net loss for fiscal 2000 was $25.1
million or $0.65 per share - basic and diluted, as compared to net income of
$14.2 million or $0.37 per share - basic and diluted. The decrease in net income
of $39.2 million from fiscal 1999 to fiscal 2000 is attributable principally to
the increases in SG&A and interest expense partially offset by higher gross
margin.
Fiscal 1999 Compared with 1998
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Sales for the 52 weeks ended February 26, 2000 of $10.2 billion decreased
$28.0 million or 0.3% from the prior year. The decrease in sales is primarily
attributable to the closure of 249 stores, excluding replacement stores, since
the beginning of fiscal 1998 including 165 stores relating to GR I. Retail
square footage decreased by approximately 1.8 million or 6.4% to 26.9 million
square feet during fiscal 1999. This decrease was caused primarily by the
closure of 142 stores reducing retail square footage by 4.4 million square feet
partially offset by the addition of 52 new stores which increased retail square
footage by 2.5 million square feet. Comparable store sales, which include
replacement stores, increased 4.4% in fiscal 1999 (4.1% in the U.S. and 6.2% in
Canada).
Average weekly sales per supermarket were approximately $245,700 in fiscal
1999 versus $210,500 in fiscal 1998, reflecting a 16.7% increase. Sales in the
U.S. decreased by $295.3 million or 3.6% compared to fiscal 1998. Sales in
Canada increased $267.3 million or 14.0% from fiscal 1998.
Gross margin as a percentage of sales decreased 4 basis points to 28.64%
for the 52 week period of fiscal 1999 from 28.68% for the 52 week period of
fiscal 1998. Margins were negatively impacted by accelerated inventory markdowns
in stores that were identified for closure under GR I and the exit of the
Atlanta market during the first quarter of fiscal 1999. The gross margin dollar
decrease of $11.6 million resulted predominantly from lower sales volume. The
U.S. operations gross margin decrease of $56.2 million resulted from lower sales
volume, which impacted gross margin by $88.1 million, partially offset by an
increase of $31.9 million from a higher gross margin rate. The Canadian
operations gross margin increase of $44.6 million resulted from higher sales
volume, which impacted gross margin by $56.7 million, and an increase of $6.4
million from fluctuations in the Canadian exchange rate. The increase was
partially offset by a decrease of $18.5 million due to a lower gross margin
rate.
The SG&A expense decreased $280.9 million from fiscal 1998. As a percentage
of sales, SG&A for fiscal 1999 decreased to 27.61% from 30.29% for the prior
year. Fiscal 1998 SG&A includes charges of $224.6 million recorded in the third
and fourth quarters to establish reserves relating to GR I. Also included in
SG&A for fiscal 1998 are shut-down costs of stores and facilities amounting to
$9.1 million relating to 66 stores and three facilities closed in the third and
fourth quarters and $5.9 million of incurred professional fees associated with
the identification and implementation of the store and facilities exit program.
Further, SG&A for fiscal 1998 includes a $7.0 million write-down of property no
longer held for a potential store site and a $4.0 million litigation charge.
Fiscal 1999 SG&A includes additional GR I related costs totaling $74.6
million, including severance of $11.1 million which could not be accrued in
fiscal 1998 because it did not meet the criteria under Emerging Issues Task
Force ("EITF") 94-3, professional fees of $16.2 million associated with the
implementation of the store exit program, transitionally higher labor costs of
$14.0 million, costs of $19.7 million for the conversion of additional stores to
the Food Basics format and $8.5 million of other miscellaneous operating costs
incurred in connection with the closures. The $74.6 million also includes the
costs of exiting the Atlanta market consisting of severance of $5.5 million and
store occupancy cost of $11.5 million which relates principally to the present
value of future lease obligations, partially offset by a gain of $11.9 million
that resulted from the disposition of fixed and intangible assets.
The total fiscal 1999 charge of $74.6 million is partially offset by a
$21.9 million reversal of GR I charges originally recorded in fiscal 1998.
Reference should be made to the "Store and Facilities Exiting Program -
Great Renewal - Phase I" section of this Management's Discussion and Analysis
for further details of the Company's exiting program.
Excluding the non-recurring charges under GR I discussed above, fiscal 1999
SG&A decreased $82.6 million from fiscal 1998. As a percentage of sales, SG&A
decreased from 27.83% to 27.09%. Fiscal 1999 results included higher SG&A of the
stores identified for closure under GR I of $68.8 million, which represented
43.4% of the sales of those stores. Excluding the results of stores identified
for closure and the non-recurring charges under GR I, fiscal 1999 SG&A as a
percentage of sales was 26.83%.
Interest expense increased $12.5 million from the previous year, primarily
due to the additional present value interest related to the future lease
obligations of the store exit programs as well as the issuance of $200 million
of 9.375% senior quarterly interest bonds on August 6, 1999.
Interest income decreased $0.4 million from the previous year, primarily
due to a lower amount of short-term investments.
For fiscal 1999, income before income taxes was $27.0 million compared to a
loss of $229.3 million in fiscal 1998, an increase of $256.3 million. Income
before taxes for U.S. operations was virtually break even compared to a loss of
approximately $244 million in fiscal 1998. The Canadian income before taxes for
fiscal 1999 amounted to $27.1 million, which was an increase of $12.3 million
from the fiscal 1998 amount of approximately $14.8 million.
The Company recorded an income tax provision amounting to $12.8 million in
fiscal 1999 as compared to an income tax benefit of $162.1 million for fiscal
1998. The fiscal 1999 income tax provision of $12.8 million reflects the
Company's estimated annual tax rates applied to its respective domestic and
foreign operations. The effective tax rate for fiscal 1999 was 47.6%. The fiscal
1998 benefit of $162.1 million includes the reversal of the Canadian operation's
deferred tax valuation allowance. During the first three quarters of fiscal
1998, the Company reversed approximately $9 million of the Canadian valuation
allowance to the extent that the Canadian operations had taxable income. At the
beginning of the fourth quarter of fiscal 1998, based upon Management's plan to
close underperforming stores in Canada, the implementation of certain tax
strategies and the continued performance improvements of the Canadian
operations, Management concluded that it was more likely than not that the net
deferred tax assets related to the Canadian operations would be realized.
Accordingly, the Company reversed the remaining portion of the Canadian deferred
tax valuation allowance amounting to approximately $60 million (see Note 8 -
Income Taxes for further discussion). The deferred tax benefit recorded during
fiscal 1998 for U.S. operations of approximately $103 million relates primarily
to book and tax differences of the store and facilities exit costs.
Based on these overall results, net income for fiscal 1999 was $14.1
million or $0.37 per share - basic and diluted, as compared to a net loss of
$67.2 million or $1.75 per share - basic and diluted. The increase in net income
of $81.3 million in fiscal 1999 from a net loss of $67.2 million in fiscal 1998
is primarily the result of improved same store sales, reduced operating costs
and the decrease in the store and facilities exit costs. The increase is
partially offset by a reduction in the number of open stores.
STORE AND FACILITIES EXITING PROGRAM - GREAT RENEWAL - PHASE I
In May 1998, a sole Chief Executive Officer was named for the Company.
Following the appointment, the Company initiated a vigorous assessment of all
aspects of its business operations in order to identify the factors that were
impacting the performance of the Company.
As a result of the above assessment, in the third quarter of fiscal 1998,
the Company decided to exit two warehouse facilities and a coffee plant in the
U.S., and a bakery plant in Canada. In connection with the exit plan, the
Company recorded a charge of approximately $11 million which is included in
"Store operating, general and administrative expense" in the Statements of
Consolidated Operations for fiscal 1998. The $11 million charge was comprised of
$7 million of severance, $3 million of facilities occupancy costs for the period
subsequent to closure and $1 million to write-down the facilities to their
estimated fair value.
As of February 27, 1999, the Company had closed and terminated operations
with respect to the two warehouses and the coffee plant. The volume associated
with the warehouses was transferred to other warehouses in close geographic
proximity. Further, the manufacturing processes of the coffee plant have been
transferred to the Company's remaining coffee processing facility. The
processing associated with the Canadian bakery was outsourced in January 1999.
In addition, in December 1998, the Company's Board of Directors approved a
plan which included the exit of 127 underperforming stores throughout the United
States and Canada and the disposal of two other properties. Included in the 127
stores were 31 stores representing the entire Richmond, Virginia market.
Further, in January 1999, the Board of Directors approved the closure of five
additional underperforming stores. In connection with the Company's plan to exit
these 132 stores and the write-down of two properties, the Company recorded a
charge in the fourth quarter of fiscal 1998 of approximately $215 million.
This $215 million charge consisted of $8 million of severance (including
pension withdrawal obligations), $1 million of facilities occupancy costs, $114
million of store occupancy costs, which principally relates to the present value
of future lease obligations, net of anticipated sublease recoveries, which
extend through fiscal 2028, an $83 million write-down of store fixed assets and
a $9 million write-down to estimated fair value of two properties. To the extent
fixed assets included in stores identified for closure could be utilized in
other continuing stores, the Company transferred those assets to continuing
stores. The Company planned to scrap fixed assets that could not be transferred,
and accordingly, the write-down was calculated based upon an estimated scrap
value. This fourth quarter charge of $215 million was reduced by approximately
$2 million in fiscal 1998 due to changes in estimates of pension withdrawal
liabilities and fixed asset write-downs from the time the original charge was
recorded. The net charge of $213 million is included in "Store operating,
general and administrative expense" in the Company's Statements of Consolidated
Operations for fiscal 1998.
In addition to the charges recorded in fiscal 1998, there were other
charges related to the plan which could not be accrued for at February 27, 1999
because they did not meet the criteria for accrual under EITF 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
Activity (Including Certain Costs Incurred in a Restructuring)". Such costs have
been expensed as incurred as the plan was being executed. During fiscal 1999,
the Company recorded an additional pretax charge of $11 million for severance
related to the 132 stores. No additional expense was recorded during fiscal
2000.
In April 1999, the Company announced that it had reached definitive
agreements to sell 14 stores in the Atlanta, Georgia market, two of which were
previously included in the Company's store exit program. In conjunction with the
sale, the Company decided to exit the entire Atlanta market and close the
remaining 22 stores, as well as the distribution center and administrative
office. Accordingly, at the time of the announcement, the Company recorded a
fiscal 1999 first quarter net pretax charge of approximately $5 million. This
charge was comprised of severance of $6 million and future lease commitments of
$11 million, partially offset by a $12 million gain related to the disposition
of fixed and intangible assets. The net charge is included in "Store operating,
general and administrative expense" in the Company's Statements of Consolidated
Operations for fiscal 1999.
As of February 24, 2001, the Company has closed 165 stores, including 34
stores in the Atlanta, Georgia market and 31 stores in the Richmond, Virginia
market.
From the time of the original charges through the end of fiscal 2000, $28
million of the total severance charges had been paid, which resulted from the
termination of approximately 3,400 employees. The remaining severance liability
relates to future obligations for early withdrawals from multi-employer union
pension plans.
At each balance sheet date, Management assesses the adequacy of the
reserve balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. The Company has made favorable
progress to date in marketing and subleasing the closed stores. As a result, in
the third quarter of fiscal 1999, the Company recorded a net reduction in SG&A
of $21.9 million to reverse a portion of the $215 million restructuring charge
recorded in fiscal 1998. This amount represents a $22.2 million reduction in
SG&A for lower store occupancy costs resulting primarily from earlier than
anticipated lease terminations and subleases. The credit is partially offset by
$0.3 million of additional fixed asset write-downs resulting from lower than
anticipated proceeds from the sale of fixed assets. Additionally, in fiscal
2000, the Company recorded a net reduction in SG&A of $3.1 million to reverse a
portion of the $215 million restructuring charge recorded in fiscal 1998. The
reversal is primarily the result of a change in estimate resulting from the sale
of one of the Company's warehouses sold during the first quarter of fiscal 2000.
Based upon current available information, Management evaluated the reserve
balance of $85.6 million as of February 24, 2001 and has concluded that it is
adequate. The Company will continue to monitor the status of the vacant
properties and further adjustments to the reserve balance may be recorded in the
future, if necessary.
SUPPLY CHAIN INITIATIVE - GREAT RENEWAL - PHASE II
On March 13, 2000, the Company announced GR II, a major initiative to
develop a state-of-the-art supply chain and business management infrastructure.
Overall, the Company expects to achieve substantial cash benefits resulting
from improved margins, lower operating expenses, reduced working capital and
better product availability. After implementation, the Company expects to
significantly raise the level of ongoing annual operating income.
Costs related to implementing GR II reduced net earnings for fiscal 2000 by
$1.15 per share. The Company expects the cost of implementing GR II to reduce
net earnings for fiscal 2001 by approximately $1.50 per share.
A team of A&P executives representing all key business functions is working
with a team of strategic alliance consultants concentrating on the food and drug
retailing industry formed by information technology industry leaders. This
combined team is upgrading all processes and business systems related to the
flow of information and products between A&P-operated offices, distribution
points and stores; and between the Company and its suppliers. Such business
processes support Store Operations, Marketing and Merchandising, Supply and
Logistics, People Resources & Services, Finance and the enabling technologies.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $94.4 million at February 24, 2001
compared to $98.3 million at February 26, 2000. The Company had cash and
short-term investments aggregating $131.6 million at the end of fiscal 2000
compared to $124.6 million as of fiscal 1999 year end. The Company had no
short-term investments at February 24, 2001 compared to $26.9 million at
February 26, 2000. Working capital of $94.4 million at February 24, 2001
includes approximately $28 million of assets held for sale within "Prepaid
expenses and other current assets" on the Company's Consolidated Balance Sheets
relating to assets to be sold and leased back in early fiscal 2001 (see Note 14
- - Sale-Leaseback Transaction for further details). Excluding the assets held for
sale, the decrease in working capital is attributable primarily to decreases in
short-term investments, accounts receivable and inventories partially offset by
an increase in cash and a decrease in accounts payable.
On August 6, 1999, the Company issued $200 million aggregate principal
amount 9.375% senior quarterly interest bonds due August 1, 2039. The Company
used the net proceeds from the issuance of the bonds to repay borrowings under
its revolving credit facility, to finance the purchase of 16 stores, (6 in the
United States and 10 in Canada) and for working capital and general corporate
purposes.
At February 24, 2001, the Company had an unsecured five year $498 million
revolving credit agreement (the "Unsecured Credit Agreement") which was to
expire June 10, 2002 with a syndicate of banks, enabling it to borrow funds on a
revolving basis sufficient to refinance short-term borrowings. This agreement
was subsequently replaced by a secured revolving credit agreement described
below. As of February 24, 2001, the Unsecured Credit Agreement was comprised of
the U.S. credit agreement amounting to $415 million and the Canadian credit
agreement amounting to C$121 million (U.S. $83 million). As of February 24,
2001, the Company had $190 million of borrowings under the Unsecured Credit
Agreement consisting of $145 million under the U.S. credit agreement and C$69
million (U.S. $45 million) under the Canadian credit agreement. This compared to
borrowings of $60 million under the U.S. credit agreement and no borrowings
under the Canadian credit agreement at February 26, 2000.
On February 23, 2001, the Company executed an agreement with a syndicate of
banks to replace the Unsecured Credit Agreement with a $425 million secured
revolving credit agreement (the "Secured Credit Agreement") expiring December
31, 2003. The outstanding borrowings under the Unsecured Credit Agreement were
refinanced with this new facility. This agreement is secured primarily by
inventory and company-owned real estate. The Secured Credit Agreement was
comprised of a U.S. credit agreement amounting to $340 million and a Canadian
credit agreement amounting to C$131 million (U.S. $85 million). Upon execution
of the Secured Credit Agreement, the syndicate was instructed to fund the
Company in an amount sufficient to repay the entire outstanding balance on the
Unsecured Credit Agreement. Such funding took place on February 28, 2001. If the
repayment of the Unsecured Credit Agreement had been funded on February 24,
2001, after reducing availability for outstanding letters of credit,
availability under the new facility would have been $183 million.
The Company's loan agreements and certain of its notes contain various
financial covenants which require, among other things, minimum fixed charge
coverage and maximum levels of leverage and capital expenditures. During the
fourth quarter of fiscal 2000, the Company negotiated the aforementioned Secured
Credit Agreement to replace its prior facility. This agreement includes
covenants, terms and conditions which reflect the Company's current operating
performance and capital programs. At February 24, 2001, the Company was in
compliance with the covenants on the notes and the Secured Credit Agreement.
As described in Note 12 of the Consolidated Financial Statements for the
fiscal year ended February 24, 2001, during fiscal 2000, an agreement was
entered into which provides financing for software purchases and hardware leases
primarily relating to the GR II. Presently, software purchases and hardware
leases will be financed at an effective rate of 8.49% per annum. Software
purchases and hardware leases will occur from time to time over the next four
years. Equal monthly payments of $1.4 million are currently being made. Such
payments are subject to change based upon the timing and amount of such funding.
As of February 24, 2001, $26.8 million was funded for software purchases and
hardware with a total fair market value of $10.7 million had been leased.
On November 1, 2000, the Company's Canadian subsidiary, The Great Atlantic
& Pacific Company of Canada, Limited, repaid its outstanding $75 million 5 year
Notes denominated in U.S. dollars. The repayment of these Notes was funded by
the Unsecured Credit Agreement at an average rate of 6.55%.
The Company has filed two Shelf Registration Statements dated January 23,
1998 and June 23, 1999, allowing it to offer up to $350 million of debt and/or
equity securities as of February 24, 2001 at terms determined by market
conditions at the time of sale.
As described in Note 14 of the Consolidated Financial Statements for the
fiscal year ended February 24, 2001, on December 29, 2000 and February 16, 2001,
the Company sold 12 properties and simultaneously leased them back from the
purchaser. Net proceeds received by the Company relating to this transaction
amounted to $113 million. The Company has or expects to enter into similar
transactions with six other owned properties in fiscal 2001 with expected gross
proceeds of $30-$40 million.
During fiscal 2000, the Company funded its capital expenditures, debt
repayments, cash dividends and GR II expenses through internally generated funds
combined with proceeds from disposals of property, bank borrowings, and
revolving lines of credit. Capital expenditures totaled $416 million during
fiscal 2000, which included 47 new supermarkets, and 45 major remodels or
enlargements, and the Company's capital expenditures related to GR II.
For fiscal 2001, the Company plans to incur approximately $100 million,
before tax benefits, in cash expenditures relating to GR II.
In addition to GR II, for fiscal 2001, the Company has planned capital
expenditures of approximately $275 million which includes costs to open 25 new
supermarkets. The Company currently expects to close a total of approximately 25
to 30 stores in fiscal 2001.
On December 5, 2000, the Board of Directors voted to discontinue payment of
the quarterly cash dividend on its common stock. Prior to that, three quarterly
cash dividends of $0.10 per share amounting to $11.5 million were declared and
paid in fiscal 2000.
On September 7, 2000, Standard & Poor's Ratings Group ("S&P") lowered its
rating on the Company's debt to BB stable. On December 15, 2000, Moody's
Investors Service ("Moody's") lowered its rating on the Company's debt to Ba3
under continued review. On December 22, 2000, S&P lowered its rating on the
Company's debt to BB with negative implications. On February 2, 2001, Moody's
lowered its rating on the Company's debt to B2. Future rating changes could
affect the availability and cost of financing to the Company.
The Company believes that its current cash resources, including the funds
available under the Secured Credit Agreement, together with cash generated from
operations, will be sufficient for the Company's 2001 GR II and other capital
expenditure programs and mandatory scheduled debt repayments throughout fiscal
2001.
MARKET RISK
Market risk represents the risk of loss from adverse market changes that
may impact the consolidated financial position, results of operations or cash
flows of the Company. Among other possible market risks, the Company is exposed
to such risk in the areas of interest rates and foreign currency exchange rates.
Interest Rates
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's debt obligations. The Company has no cash flow
exposure due to rate changes on its $700 million in notes as of February 24,
2001 because they are at fixed interest rates. However, the Company does have
cash flow exposure on its committed and uncommitted bank lines of credit due to
its variable LIBOR pricing. Accordingly, as of February 24, 2001, a 1% change in
LIBOR will result in interest expense fluctuating $1.9 million.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. For the fiscal year ended February 24,
2001, a change in the Canadian currency of 10% would have resulted in a
fluctuation in net income of $1.9 million. The Company does not believe that a
change in the Canadian currency of 10% will have a material effect on the
financial position or cash flows of the Company.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). This Statement
requires that all derivative instruments be measured at fair value and
recognized in the Consolidated Balance Sheets as either assets or liabilities.
In addition, the accounting for changes in the fair value of a derivative (gains
and losses) depends on the intended use of the derivative and the resulting
designation. For a derivative designated as a hedge, the change in fair value
will be recognized as a component of other comprehensive income; for a
derivative not designated as a hedge, the change in the fair value will be
recognized in the Statements of Consolidated Operations.
In June 1999, the FASB issued SFAS No. 137, "Accounting For Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" which delayed the adoption of SFAS 133 for one year, to
fiscal years beginning after June 15, 2000.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Financial Instruments and Certain Hedging Activities - An Amendment
of FASB Statement No. 133". This Statement amends the accounting and reporting
standards of SFAS 133 for certain derivative instruments, for certain hedging
activities and for decisions made by the FASB relating to the Derivatives
Implementation Group ("DIG") process. Certain decisions arising from the DIG
process that required specific amendments to SFAS 133 were incorporated into
this Statement. The Company is required to adopt SFAS 133 as amended in the
first quarter of fiscal 2001. At February 24, 2001, the Company did not have any
derivative instruments that would result in a transition adjustment upon the
adoption of this standard on February 25, 2001. However, the DIG is continually
interpreting SFAS 133. Contracts that the Company has concluded are not
derivatives could potentially be classified as derivatives based on new
interpretive guidance.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 was issued to provide guidance in applying generally
accepted accounting principles to the large number of revenue recognition issues
that registrants encounter, including nonrefundable, up-front fees and the
disclosure of judgements as to the appropriateness of the principles relating to
revenue recognition accounting policies. Since the issuance of SAB 101, the
Staff has received requests from a number of groups asking for additional time
to determine the effects, if any, on registrants' revenue recognition practices
and as such, the SEC has delayed the implementation date of SAB 101 until no
later than the fourth quarter of fiscal years beginning after December 15, 1999.
The Company has evaluated the impact of this Staff Accounting Bulletin and has
concluded that it has no effect on the Consolidated Financial Statements. Retail
revenue is recognized at point of sale while wholesale revenue is recognized in
accordance with its terms, when goods are shipped. Vendor allowances and credits
that relate to the Company's buying and merchandising activities are recognized
as earned.
In May 2000, the EITF issued No. 00-14 "Accounting for Certain Sales
Incentives". The EITF reached a consensus on several issues involving the
accounting and income statement classification of rebates, coupons and other
discounts. The Company has evaluated the impact of this issue and has concluded
that it has no effect on the accounting or classification of sales incentives
because coupons issued by the Company are recorded upon redemption as a
reduction of sales.
CAUTIONARY NOTE
This report contains certain forward-looking statements about the future
performance of the Company which are based on Management's assumptions and
beliefs in light of the information currently available to it. The Company
assumes no obligation to update the information contained herein. These
forward-looking statements are subject to uncertainties and other factors that
could cause actual results to differ materially from such statements including,
but not limited to: competitive practices and pricing in the food industry
generally and particularly in the Company's principal markets; the Company's
relationships with its employees and the terms of future collective bargaining
agreements; the costs and other effects of legal and administrative cases and
proceedings; the nature and extent of continued consolidation in the food
industry; changes in the financial markets which may affect the Company's cost
of capital and the ability of the Company to access the public debt and equity
markets to refinance indebtedness and fund the Company's capital expenditure
programs on satisfactory terms; supply or quality control problems with the
Company's vendors and changes in economic conditions which affect the buying
patterns of the Company's customers.
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Operations
(Dollars in thousands, except per share amounts)
52 Weeks Ended
---------------------------------------------------
Feb. 24, 2001 Feb. 26, 2000 Feb. 27, 1999
------------- ------------- -------------
Sales $ 10,622,866 $ 10,151,334 $10,179,358
Cost of merchandise
sold (7,594,450) (7,243,718) (7,260,110)
---------- ---------- ----------
Gross margin 3,028,416 2,907,616 2,919,248
Store operating, general
and administrative
expense (2,978,223) (2,802,786) (3,083,639)
---------- ------------ -----------
Income (loss) from
operations 50,193 104,830 (164,391)
Interest expense (96,088) (84,045) (71,497)
Interest income 6,222 6,218 6,604
---------- ------------ -----------
(Loss) income before
income taxes (39,673) 27,003 (229,284)
Benefit from (provision
for) income taxes 14,605 (12,843) 162,120
----------- ------------ -----------
Net (loss) income $ (25,068) $ 14,160 $ (67,164)
=========== ============ ===========
Net (loss) income per share - basic
and diluted $ (0.65) $ 0.37 $ (1.75)
========== ========== =========
Weighted average common shares
outstanding - basic 38,347,216 38,330,379 38,273,859
========== ========== ==========
Weighted average common shares
outstanding - diluted 38,347,216 38,415,420 38,273,859
========== ========== ==========
See Notes to Consolidated Financial Statements.
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Stockholders' Equity and Comprehensive (Loss) Income
(Dollars in thousands, except share amounts)
Una- Accumu
mortized lated
value of other
Addit- restrict- compre- Total
Common Stock ional ed hensive stock-
--------------- paid-in stock (loss)/ Retained holders'
Shares Amount capital grant income earnings equity
------ ------ ------- --------- -------- -------- --------
Balance at
2/29/98 38,252,966 $38,253 $453,894 $ - $(61,025) $495,510 $926,632
Net loss (67,164) (67,164)
Stock
options
exercised 37,750 38 1,077 1,115
Comprehensive
loss (8,014) (8,014)
Cash dividends (15,312) (15,312)
--------- ------- ------- -------- --------- ------- ---------
Balance at
2/27/99 38,290,716 38,291 454,971 - (69,039) 413,034 837,257
Net income 14,160 14,160
Stock
options
exercised 56,500 56 1,499 1,555
Issuance of
20,000
shares of
restricted
common
stock 20,000 20 631 (651) -
Amortization
of restricted
stock grant 210 210
Comprehensive
income 8,343 8,343
Cash dividends (15,333) (15,333)
---------- ------ ------- ------ ------- ------- ---------
Balance at
2/26/00 38,367,216 38,367 457,101 (441)(60,696) 411,861 846,192
Net loss (25,068) (25,068)
Forfeiture
of restricted
stock
grant (20,000) (20) (631) 441 (210)
Comprehensive
loss (12,112) (12,112)
Cash dividends (11,505) (11,505)
--------- ------- ------- ----- -------- ------- --------
Balance at
2/24/01 38,347,216 $38,347 $456,470 $ - $(72,808) $375,288 $797,297
========== ======= ======== ===== ======== ======== ========
52 Weeks Ended
---------------------------------
02/24/01 02/26/00 02/27/99
-------- -------- --------
Comprehensive (loss) income
Net (loss) income $(25,068) $14,160 $(67,164)
-------- ------- --------
Foreign currency translation adjustment (14,802) 6,784 (9,936)
Minimum pension liability adjustment 2,690 1,559 1,922
------- ------ -------
Other comprehensive (loss) income (12,112) 8,343 (8,014)
------- ------ -------
Total comprehensive (loss) income $(37,180) $22,503 $(75,178)
======== ======= ========
See Notes to Consolidated Financial Statements.
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
Feb. 24, 2001 Feb. 26, 2000
------------- -------------
Assets
Current assets:
Cash and short-term investments $131,550 $124,603
Accounts receivable 183,382 227,078
Inventories 783,758 791,150
Prepaid expenses and other current assets 103,164 80,052
------- -------
Total current assets 1,201,854 1,222,883
--------- ---------
Property:
Land 107,893 137,672
Buildings 359,275 420,345
Equipment and leasehold improvements 2,388,366 2,274,349
--------- ---------
Total-at cost 2,855,534 2,832,366
Less accumulated depreciation and amortization (1,050,279) (1,042,704)
---------- ----------
Property owned 1,805,255 1,789,662
Property leased under capital leases 84,758 94,146
------- -------
Property-net 1,890,013 1,883,808
Other assets 217,936 228,834
------- -------
Total assets $3,309,803 $3,335,525
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 6,195 $ 2,382
Current portion of obligations under
capital leases 11,634 11,327
Accounts payable 566,482 583,142
Book overdrafts 108,448 112,465
Accrued salaries, wages and benefits 158,450 155,649
Accrued taxes 62,169 51,611
Other accruals 194,106 208,002
------- -------
Total current liabilities 1,107,484 1,124,578
--------- ---------
Long-term debt 915,321 865,675
Long-term obligations under capital leases 106,797 117,870
Other non-current liabilities 382,904 381,210
------- -------
Total liabilities 2,512,506 2,489,333
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock-no par value;
authorized - 3,000,000
shares; issued - none - -
Common stock - $1 par value;
authorized - 80,000,000
shares; issued and outstanding - 38,347,216 and
38,367,216 shares at February 24, 2001 and
February 26, 2000, respectively 38,347 38,367
Additional paid-in capital 456,470 457,101
Unamortized value of restricted stock grant - (441)
Accumulated other comprehensive loss (72,808) (60,696)
Retained earnings 375,288 411,861
------- -------
Total stockholders' equity 797,297 846,192
------- -------
Total liabilities and stockholders' equity $3,309,803 $3,335,525
========== ==========
See Notes to Consolidated Financial Statements.
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Cash Flows
(Dollars in thousands)
52 Weeks Ended
----------------------------------
Feb. 24, Feb. 26, Feb. 27,
2001 2000 1999
---------- ---------- ----------
Cash Flows From Operating Activities:
Net (loss) income $(25,068) $ 14,160 $(67,164)
Adjustments to reconcile net (loss) income
to cash provided by operating activities:
Store/Facilities exit charge
and asset write-off (3,104) 14,078 224,580
Environmental charge 4,329 - -
Depreciation and amortization 255,771 232,712 233,663
Deferred income tax (benefit) provision (18,136) 8,258 (165,672)
Loss (gain) on disposal of owned property
and write-down of property, net 4,263 (2,973) 4,541
Decrease (increase) in receivables 41,085 (23,041) 19,562
(Increase) decrease in inventories (336) 60,026 34,762
Decrease in prepaid expenses and other
current assets 4,903 2,392 6,816
(Increase) decrease in other assets (7,648) (16,630) 2,071
Increase in accounts payable 5,443 16,546 122,251
Increase in accrued expenses 13,104 4,797 2,633
(Decrease) increase in other accruals (25,644) 518 43,604
Increase in other non-current liabilities 2,353 5,432 28,203
Other, net 2,446 (1,615) (2,764)
-------- -------- --------
Net cash provided by operating activities 253,761 314,660 487,086
-------- -------- --------
Cash Flows From Investing Activities:
Expenditures for property (415,842) (479,572) (438,345)
Proceeds from disposal of property 150,255 101,319 12,546
-------- -------- --------
Net cash used in investing activities (265,587) (378,253) (425,799)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds under revolving lines of credit 817,447 165,102 451,523
Payments on revolving lines of credit (602,307) (235,150) (411,632)
Proceeds from long-term borrowings 4,981 206,010 3,685
Payments on long-term borrowings (166,670) (4,975) (22,456)
Principal payments on capital leases (11,252) (11,968) (12,139)
(Decrease) increase in book overdrafts (3,298) (49,354) 12,079
Deferred financing fees (6,428) (6,298) -
Proceeds from stock options exercised - 1,555 1,115
Cash dividends (11,505) (15,333) (15,312)
-------- -------- --------
Net cash provided by financing activities 20,968 49,589 6,863
-------- -------- --------
Effect of exchange rate changes on cash and
short-term investments (2,195) 1,797 (2,277)
-------- -------- --------
Net increase (decrease) in cash and
short-term investments 6,947 (12,207) 65,873
Cash and short-term investments at
beginning of year 124,603 136,810 70,937
------- ------- ------
Cash and short-term investments at end of year $131,550 $124,603 $136,810
======== ======== ========
See Notes to Consolidated Financial Statements.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, and where noted)
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. The Company operates retail supermarkets in
the United States and Canada. The U.S. operations are mainly in the Eastern part
of the U.S. and certain parts of the Midwest. See the following footnotes for
additional information on the Canadian Operations: Note 4 - Wholesale Franchise
Business, Note 5 - Indebtedness, Note 8 - Income Taxes, Note 9 - Retirement
Plans and Benefits, and Note 13 - Operating Segments. The principal stockholder
of the Company, Tengelmann Warenhandelsgesellschaft, owned 56.6% of the
Company's common stock as of February 24, 2001.
Fiscal Year
- -----------
The Company's fiscal year ends on the last Saturday in February. Fiscal
2000 ended February 24, 2001, fiscal 1999 ended February 26, 2000 and fiscal
1998 ended February 27, 1999. Fiscal 2000, fiscal 1999 and fiscal 1998 were each
comprised of 52 weeks.
Revenue Recognition
- -------------------
Retail revenue is recognized at point-of-sale while wholesale revenue is
recognized in accordance with its terms, when goods are shipped.
Cash and Short-term Investments
- -------------------------------
Short-term investments that are highly liquid with an original maturity of
three months or less are included in "Cash and short-term investments" and are
deemed to be cash equivalents.
Inventories
- -----------
Store inventories are valued principally at the lower of cost or market
with cost determined under the retail method. Warehouse and other inventories
are valued primarily at the lower of cost or market with cost determined on a
first-in, first-out basis. Inventories of certain acquired companies are valued
using the last-in, first-out method, which was their practice prior to
acquisition. See Note 3 - Inventory for additional information regarding the
Company's use of the last-in, first-out method.
Advertising Costs
- -----------------
Advertising costs are expensed as incurred. The Company recorded
advertising expense of $147 million, $139 million and $136 million for fiscal
2000, 1999 and 1998, respectively.
Pre-opening Costs
- -----------------
The costs of opening new stores are expensed as incurred.
Software Costs
- --------------
The Company capitalizes externally purchased software and amortizes it over
three years. Amortization expense for fiscal 2000, 1999 and 1998 was $1.4
million, $0.9 million and $0.8 million, respectively.
Effective February 29, 1998, the Company adopted the provisions of the
American Institute of Certified Public Accountants' Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 requires the capitalization of certain
internally generated software costs. In fiscal 2000, 1999 and 1998, the Company
capitalized $3.7 million, $0.9 million and $1.4 million, respectively, of such
software costs. Such software is amortized over three years and for fiscal 2000,
1999 and 1998, the Company recorded amortization expense of $0.7 million, $0.5
million and $0.1 million, respectively.
Earnings Per Share
- ------------------
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires dual presentation of basic and diluted earnings per
share ("EPS") on the face of the Statements of Consolidated Operations and
requires a reconciliation of the numerators and denominators of the basic and
diluted EPS calculations. Basic EPS is computed by dividing net income by the
weighted average shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if options to issue common stock were
exercised and converted to common stock.
The weighted average shares outstanding utilized in the basic EPS
calculation were 38,347,216 for fiscal 2000, 38,330,379 for fiscal 1999 and
38,273,859 for fiscal 1998. The common stock equivalents that were added to the
weighted average shares outstanding for purposes of diluted EPS were 85,041 for
fiscal 1999. The common stock equivalents for fiscal 2000 and 1998 would have
been 14,478 and 47,772, respectively; however, such shares were antidilutive and
thus excluded from the diluted EPS calculation.
Excess of Cost over Net Assets Acquired
- ---------------------------------------
The excess of cost over fair value of net assets acquired is amortized on a
straight-line basis between fifteen to forty years. The Company recorded
amortization expense of $1.5 million for both fiscal 2000 and 1998 and $1.2
million for fiscal 1999. The book value of excess of cost over net assets
acquired at February 24, 2001 and February 26, 2000 was $34.2 million and $34.1
million, net of accumulated amortization relating to goodwill of $12.5 million
and $11.1 million, respectively.
At each balance sheet date, Management reassesses the appropriateness of
the goodwill balance based on forecasts of cash flows from operating results on
an undiscounted basis. If the results of such comparison indicate that an
impairment may exist, the Company will recognize a charge to operations at that
time based upon the difference between the present value of the expected cash
flows from future operating results (utilizing a discount rate equal to the
Company's average cost of funds at that time) and the balance sheet value. The
recoverability of goodwill is at risk to the extent the Company is unable to
achieve its forecast assumptions regarding cash flows from operating results. At
February 24, 2001, the Company estimates that the cash flows projected to be
generated by the respective businesses on an undiscounted basis should be
sufficient to recover the existing goodwill balance over its remaining life.
Long-Lived Assets
- -----------------
The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. Such review is based upon groups of assets and the undiscounted
estimated future cash flows from such assets to determine if the carrying value
of such assets are recoverable from their respective cash flows.
The Company recorded impairment losses during the year ended February 24,
2001 related to the sale leaseback transaction (see Note 14 - Sale-Leaseback
Transaction for further details) and during the year ended February 27, 1999
related to its store and facility exit initiative (see Note 2 - Store and
Facilities Exit Costs for further details).
Properties
- ----------
Depreciation and amortization are calculated on the straight-line basis
over the estimated useful lives of the assets. Buildings are depreciated based
on lives varying from twenty to fifty years and equipment based on lives varying
from three to ten years. Real property leased under capital leases is amortized
over the lives of the respective leases or over their economic useful lives,
whichever is less. During fiscal 2000, 1999 and 1998, the Company disposed of
and/or wrote down certain assets which resulted in a pretax net loss of $4
million, a pretax net gain of $3 million, and a pretax net loss of $5 million,
respectively.
Income Taxes
- ------------
The Company provides deferred income taxes on temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws.
Current Liabilities
- -------------------
Certain accounts payable checks issued but not presented to banks
frequently result in negative book balances for accounting purposes. Such
amounts are classified as "Book overdrafts" in the Consolidated Balance Sheets.
The Company accrues for vested and non-vested vacation pay. Liabilities for
compensated absences of $81.7 million and $78.8 million at February 24, 2001 and
February 26, 2000, respectively, are included in the balance sheet caption
"Accrued salaries, wages and benefits".
Stock-Based Compensation
- ------------------------
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB 25") with pro forma disclosure of net income and
earnings per share as if the fair value based method prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") had been applied.
Comprehensive Income
- --------------------
Effective March 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement requires that all components of
comprehensive income be reported prominently in the financial statements.
Currently, the Company has other comprehensive income relating to foreign
currency translation adjustment and minimum pension liability adjustment.
Accumulated other comprehensive loss as of February 24, 2001 includes
foreign currency translation of $72.7 million and an additional minimum pension
liability of less than $0.1 million. Accumulated other comprehensive loss as of
February 26, 2000 includes foreign currency translation of $58.0 million and an
additional minimum pension liability of $2.7 million, net of income tax benefit
of $2.2 million. Accumulated other comprehensive loss as of February 27, 1999
includes foreign currency translation of $64.8 million and an additional minimum
pension liability of $4.3 million, net of income tax benefit of $3.4 million.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Consolidated Balance Sheets include liabilities with respect to
self-insured workers' compensation and general liability claims. The Company
determines the required liability of such claims based upon various assumptions
which include, but are not limited to, the Company's historical loss experience,
industry loss standards, projected loss development factors, projected payroll,
employee headcount and other internal data. It is reasonably possible that the
final resolution of some of these claims may require significant expenditures by
the Company in excess of its existing reserves, over an extended period of time
and in a range of amounts that cannot be reasonably estimated.
Reclassifications
- -----------------
Certain reclassifications have been made to the prior years' financial
statements in order to conform to the current year's presentation.
New Accounting Pronouncements Not Yet Adopted
- ---------------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement requires that all derivative instruments be measured at
fair value and recognized in the balance sheet as either assets or liabilities.
In addition, the accounting for changes in the fair value of a derivative (gains
and losses) depends on the intended use of the derivative and the resulting
designation. For a derivative designated as a hedge, the change in fair value
will be recognized as a component of other comprehensive income; for a
derivative not designated as a hedge, the change in the fair value will be
recognized in the Statements of Consolidated Operations.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" which delayed the adoption of SFAS 133 for one year, to
fiscal years beginning after June 15, 2000.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Financial Instruments and Certain Hedging Activities - An Amendment
of FASB Statement No. 133". This Statement amends the accounting and reporting
standards of SFAS 133 for certain derivative instruments, for certain hedging
activities and for decisions made by the FASB relating to the Derivatives
Implementation Group ("DIG") process. Certain decisions arising from the DIG
process that required specific amendments to SFAS 133 were incorporated into
this Statement. The Company is required to adopt SFAS 133 as amended in the
first quarter of fiscal 2001. At February 24, 2001, the Company did not have any
derivative instruments that would result in a transition adjustment upon the
adoption of this standard on February 25, 2001. However, the DIG is continually
interpreting SFAS 133. Contracts that the Company has concluded are not
derivatives could potentially be classified as derivatives based on new
interpretive guidance.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 was issued to provide guidance in applying generally
accepted accounting principles to the large number of revenue recognition issues
that registrants encounter, including nonrefundable, up-front fees and the
disclosure of judgements as to the appropriateness of the principles relating to
revenue recognition accounting policies. Since the issuance of SAB 101, the
Staff has received requests from a number of groups asking for additional time
to determine the effects, if any, on registrants' revenue recognition practices
and as such, the SEC has delayed the implementation date of SAB 101 until no
later than the fourth quarter of fiscal years beginning after December 15, 1999.
The Company has evaluated the impact of this Staff Accounting Bulletin and has
concluded that it has no effect on the Consolidated Financial Statements. Retail
revenue is recognized at point of sale while wholesale revenue is recognized in
accordance with its terms, when goods are shipped. Vendor allowances and credits
that relate to the Company's buying and merchandising activities are recognized
as earned.
In May 2000, the Emerging Issues Task Force ("EITF") issued No. 00-14
"Accounting for Certain Sales Incentives". The EITF reached a consensus on
several issues involving the accounting and income statement classification of
rebates, coupons and other discounts. The Company has evaluated the impact of
this issue and has concluded that it has no effect on the accounting or
classification of sales incentives because coupons issued by the Company are
recorded upon redemption as a reduction of sales.
Note 2 - Store and Facilities Exit Costs (Great Renewal - Phase I)
In May 1998, the Company initiated a vigorous assessment of all aspects of
its business operations in order to identify the factors that were impacting the
performance of the Company.
As a result of the above assessment, in the third quarter of fiscal 1998,
the Company decided to exit two warehouse facilities and a coffee plant in the
U.S., and a bakery plant in Canada. In connection with the exit plan, the
Company recorded a charge of approximately $11 million which is included in
"Store operating, general and administrative expense" in the Company's
Statements of Consolidated Operations for fiscal 1998. The $11 million charge
was comprised of $7 million of severance, $3 million of facilities occupancy
costs for the period subsequent to closure and $1 million to write-down the
facilities to their estimated fair value.
As of February 27, 1999, the Company had closed and terminated operations
with respect to the two warehouses and the coffee plant. The volume associated
with the warehouses was transferred to other warehouses in close geographic
proximity. Further, the manufacturing processes of the coffee plant were
transferred to the Company's remaining coffee processing facility. The
processing associated with the Canadian bakery was outsourced in January 1999.
In addition, in December 1998, the Company's Board of Directors approved a
plan which included the exit of 127 underperforming stores throughout the United
States and Canada and the disposal of two other properties. Included in the 127
stores were 31 stores representing the entire Richmond, Virginia market.
Further, in January 1999, the Board of Directors approved the closure of five
additional underperforming stores. In connection with the Company's plan to exit
these 132 stores and the write-down of two properties, the Company recorded a
charge in the fourth quarter of fiscal 1998 of approximately $215 million.
This $215 million charge consisted of $8 million of severance (including
pension withdrawal obligations), $1 million of facilities occupancy costs, $114
million of store occupancy costs, which principally relates to the present value
of future lease obligations, net of anticipated sublease recoveries, which
extend through fiscal 2028, an $83 million write-down of store fixed assets and
a $9 million write-down to estimated fair value of two properties. To the extent
fixed assets included in those stores identified for closure could be utilized
in other continuing stores, the Company transferred those assets to continuing
stores. The Company planned to scrap fixed assets that could not be transferred,
and accordingly, the write-down was calculated based upon an estimated scrap
value. This fourth quarter charge of $215 million was reduced by approximately
$2 million in fiscal 1998 due to changes in estimates of pension withdrawal
liabilities and fixed asset write-downs from the time the original charge was
recorded. The net charge of $213 million is included in "Store operating,
general and administrative expense" in the Company's Statements of Consolidated
Operations for fiscal 1998.
In addition to the charges recorded in fiscal 1998, there were other
charges related to the plan which could not be accrued for at February 27, 1999
because they did not meet the criteria for accrual under EITF 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
Activity (Including Certain Costs Incurred in a Restructuring)". Such costs have
been expensed as incurred as the plan was being executed. During fiscal 1999,
the Company recorded an additional pretax charge of $11 million for severance
related to the 132 stores. No additional charges were recorded during fiscal
2000.
In April 1999, the Company announced that it had reached definitive
agreements to sell 14 stores in the Atlanta, Georgia market, two of which were
previously included in the Company's store exit program. In conjunction with the
sale, the Company decided to exit the entire Atlanta market and close the
remaining 22 stores, as well as the distribution center and administrative
office. Accordingly, at the time of the announcement, the Company recorded a
fiscal 1999 first quarter net pretax charge of approximately $5 million. This
charge was comprised of severance of $6 million and future lease commitments of
$11 million, partially offset by a $12 million gain related to the disposition
of fixed and intangible assets. The net charge is included in "Store operating,
general and administrative expense" in the Company's Statements of Consolidated
Operations for fiscal 1999.
The Company paid $28 million of the total severance charges from the time
of the original charges through the end of fiscal 2000, which resulted from the
termination of approximately 3,400 employees. The remaining severance liability
relates to future obligations for early withdrawals from multi-employer union
pension plans.
The following reconciliation summarizes the activity related to the
aforementioned charges since their initial recording:
Severance
Store Fixed and Facilities
Occupancy Assets Benefits Occupancy Total
------------ --------- --------- ------------ ------
Original Charge $113,732 $93,355 $15,102 $4,018 $226,207
Addition (1) 1,900 - - - 1,900
Utilization (1,100) (92,639) (3,794) (311) (97,844)
Adjustment (2) - (716) (1,242) 331 (1,627)
------- ------ ------- ------ -------
Reserve Balance at
Feb. 27, 1999 114,532 - 10,066 4,038 128,636
Addition (1) 15,730 - 17,060 3,188 35,978
Utilization (4,614)(3) (295) (19,626) (3,659) (28,194)
Adjustment (2) (22,195) 295 - - (21,900)
------- ------ ------- ------ -------
Reserve Balance at
Feb. 26, 2000 103,453 - 7,500 3,567 114,520
Addition (1) 5,062 - - - 5,062
Utilization (4) (25,654) - (4,779) (463) (30,896)
Adjustment (2) - - - (3,104) (3,104)
------- ------- ------- ------ -------
Reserve Balance at
Feb. 24, 2001 $82,861 $ - $ 2,721 $ - $85,582
======= ======= ======= ====== =======
(1) The additions to store occupancy of $1.9 million and $5.1 million during
fiscal 1998 and 2000 represent the present value of accrued interest related
to lease obligations. The fiscal 1999 addition represents an increase to the
store occupancy reserve for the present value of accrued interest of $7.4
million, additional severance cost of $11.5 million and the cost of exiting
the Atlanta market (including store occupancy of $8.3 million, severance of
$5.6 million and facilities costs of $3.2 million).
(2) At each balance sheet date, Management assesses the adequacy of the reserve
balance to determine if any adjustments are required as a result of changes
in circumstances and/or estimates. As a result, in fiscal 1998, the Company
recorded an adjustment to severance and benefits related to a change in the
estimate of the calculated pension withdrawal liability. In the third quarter
of fiscal 1999, the Company recorded a net reduction in "Store operating,
general and administrative expense" of $21.9 million to reverse a portion of
the $215 million restructuring charge recorded in fiscal 1998. This amount
represents a $22.2 million reduction in "Store operating, general and
administrative expense" for lower store occupancy costs resulting primarily
from earlier than anticipated lease terminations and subleases. The credit is
partially offset by $0.3 million of additional fixed asset write-downs
resulting from lower than anticipated proceeds from the sale of fixed assets.
In fiscal 2000, the Company recorded a net reduction in "Store operating,
general and administrative expense" of $3.1 million to reverse a portion of
the $215 million restructuring charge recorded in fiscal 1998. The reversal
is primarily a result of a change in estimate resulting from the sale of one
of the Company's warehouses sold during the first quarter of fiscal 2000.
(3) Store occupancy utilization for fiscal 1999 is comprised of $29.6 million of
lease and other occupancy payments for the period, net of $25.0 million of
net proceeds on the assignment of leases which was considered in determining
the original charge recorded during fiscal 1998.
(4) Store occupancy utilization of $25.7 million and facilities occupancy of
$0.5 million represent lease and other occupancy payments made during fiscal
2000.
Based upon current available information, Management evaluated the reserve
balance of $85.6 million as of February 24, 2001 and has concluded that it is
adequate. The Company will continue to monitor the status of the vacant
properties and further adjustments to the reserve balance may be recorded in the
future, if necessary.
At February 24, 2001, approximately $14 million of the reserve is included
in "Other accruals" and the remaining amount is included in "Other non-current
liabilities" in the Consolidated Balance Sheets.
Included in the Statements of Consolidated Operations are the operating
results of the 132 underperforming stores (including 31 stores in the Richmond,
Virginia market) and the 34 Atlanta stores which the Company has exited. The
operating results of these stores are as follows:
52 Weeks Ended
----------------------------------
Feb. 24, Feb. 26, Feb. 27,
2001 2000 1999
--------- -------- ----------
Sales $ 678 $200,208 $1,069,441
========= ======== ==========
Operating loss $ (139) $(30,572) $ (43,105)
========= ======== ==========
As of the end of fiscal 2000, the Company had closed 165 stores, including 34
stores in the Atlanta, Georgia market and 31 stores in the Richmond, Virginia
market.
Note 3 - Inventory
Approximately 12% and 13% of the Company's inventories are valued using the
last-in, first-out ("LIFO") method at February 24, 2001 and February 26, 2000,
respectively. Such inventories would have been $18.1 million and $19.6 million
higher at February 24, 2001 and February 26, 2000, respectively, if the retail
and first-in, first-out methods were used. The Company recorded a LIFO credit of
$1.5 million in fiscal 2000 compared to LIFO charges of approximately $0.9
million in 1999 and $1.0 million in 1998. Liquidation of LIFO layers in the
periods reported did not have a significant effect on the results of operations.
Note 4 - Wholesale Franchise Business
The Company serviced 68 franchised stores as of February 24, 2001 and 65
stores as of February 26, 2000. These franchised stores are required to purchase
inventory exclusively from the Company which acts as a wholesaler to the
franchisees. During fiscal 2000, 1999 and 1998, the Company had wholesale sales
to these franchised stores of $638 million, $523 million and $387 million,
respectively. A majority of the franchised stores were converted from Company
operated supermarkets. The Company subleases the stores and leases the equipment
in the stores to the franchisees. The Company also provides merchandising,
advertising, accounting and other consultative services to the franchisees for
which it receives a nominal fee which mainly represents the reimbursements of
costs incurred to provide such services.
The Company holds as assets inventory notes collateralized by the inventory
in the stores and equipment lease receivables collateralized by the equipment in
the stores. The current portion of the inventory notes and equipment leases, net
of allowance for doubtful accounts, amounting to approximately $3.7 million and
$4.1 million, are included in "Accounts receivable" at February 24, 2001 and
February 26, 2000, respectively. The long-term portion of the inventory notes
and equipment leases, net of allowance for doubtful accounts, amounting to
approximately $55.3 million and $53.4 million, are included in "Other assets" at
February 24, 2001 and February 26, 2000, respectively.
The repayment of the inventory notes and equipment leases are dependent
upon positive operating results of the stores. To the extent that the
franchisees incur operating losses, the Company establishes an allowance for
doubtful accounts. The Company continually assesses the sufficiency of the
allowance on a store by store basis based upon the operating results and the
related collateral underlying the amounts due from the franchisees. In the event
of default by a franchisee, the Company reserves the option to reacquire the
inventory and equipment at the store and operate the franchise as a corporate
owned store.
Included below are the amounts due to the Company for the next five years
and thereafter from the franchised stores for equipment leases and inventory
notes.
Fiscal
------
2001 $ 7,715
2002 10,361
2003 9,777
2004 9,636
2005 9,557
2006 and thereafter 35,909
--------
82,955
Less interest portion (23,995)
--------
Due from franchise business $ 58,960
========
For fiscal 2000, 1999 and 1998, approximately $15 million, $18 million and
$8 million, respectively, of the franchise business notes relate to equipment
leases which were non-cash transactions and, accordingly, have been excluded
from the Statements of Consolidated Cash Flows.
Note 5 - Indebtedness
Debt consists of the following:
Feb. 24, Feb. 26,
2001 2000
----------- -----------
9.375% Notes, due August 1, 2039 $200,000 $200,000
7.75% Notes, due April 15, 2007 300,000 300,000
7.70% Senior Notes, due January 15, 2004 200,000 200,000
7.78% Notes, due November 1, 2000 - 75,000
Mortgages and Other Notes, due 2001 through 2003
(average interest rates at year end of 8.38% and
7.12%, respectively) 28,658 8,023
U.S. Bank Borrowings at 6.55% and 6.35%, respectively 194,607 87,000
Less unamortized discount on 7.75% Notes (1,749) (1,966)
------- -------
921,516 868,057
Less current portion (6,195) (2,382)
------- -------
Long-term debt $915,321 $865,675
======== ========
At February 24, 2001, the Company had an unsecured five year $498 million
revolving credit agreement (the "Unsecured Credit Agreement") which was to
expire on June 10, 2002 with a syndicate of banks, enabling it to borrow funds
on a revolving basis sufficient to refinance short-term borrowings. This
agreement was subsequently replaced by a secured revolving credit agreement
described below. As of February 24, 2001, the Unsecured Credit Agreement was
comprised of the U.S. credit agreement amounting to $415 million and the
Canadian credit agreement amounting to C$121 million (U.S. $83 million). As of
February 24, 2001, the Company had $190 million of borrowings under the
Unsecured Credit Agreement consisting of $145 million under the U.S. credit
agreement and C$69 million (U.S. $45 million) under the Canadian credit
agreement. This compared to borrowings of $60 million under the U.S. credit
agreement and no borrowings under the Canadian credit agreement at February 26,
2000. Accordingly, as of February 24, 2001, the Company had $308 million
available under the Unsecured Credit Agreement consisting of $270 million under
the U.S. credit agreement and C$53 million (U.S. $38 million) under the Canadian
credit agreement. This compared to availability of $439 million at February 26,
2000 consisting of $405 million under the U.S. credit agreement and C$50 million
(U.S. $34 million) under the Canadian credit agreement. The Company paid a
facility fee of 0.375% per annum on the total commitment of the U.S. and
Canadian revolving credit facilities and 1% on the borrowed amount.
On February 23, 2001, the Company executed an agreement with a syndicate of
banks to replace the Unsecured Credit Agreement with a $425 million secured
revolving credit agreement (the "Secured Credit Agreement") expiring December
31, 2003. The outstanding borrowings under the Unsecured Credit Agreement were
refinanced with this new facility. This agreement is secured primarily by
inventory and company-owned real estate which, at February 24, 2001, had a net
book value of $658 million and $88 million, respectively. The Secured Credit
Agreement was comprised of a U.S. credit agreement amounting to $340 million and
a Canadian credit agreement amounting to C$131 million (U.S. $85 million). Based
on the Company's current debt rating, borrowings under the agreement bear
interest on spreads to LIBOR and Prime, and at February 24, 2001 the borrowing
rate under the new agreement was 8.03%. Upon execution of the Secured Credit
Agreement, the syndicate was instructed to fund the Company in an amount
sufficient to repay the entire outstanding balance on the Unsecured Credit
Agreement. Such funding took place on February 28, 2001. If the repayment of the
Unsecured Credit Agreement had been funded on February 24, 2001, after reducing
availability for outstanding letters of credit, availability under the new
facility would have been $183 million.
On November 1, 2000, the Company's Canadian subsidiary, The Great Atlantic
& Pacific Company of Canada, Limited, repaid its outstanding $75 million 5 year
Notes denominated in U.S. dollars. The repayment of these Notes was funded by
the Unsecured Credit Agreement at an average rate of 6.55%.
As of February 24, 2001 and February 26, 2000, the Company had borrowings
under uncommitted lines of credit of $5 million and $27 million, respectively.
As of February 24, 2001, the Company has outstanding a total of $500
million of unsecured, non-callable public debt securities in the form of $200
million 7.70% Notes due January 15, 2004 and $300 million 7.75% Notes due April
15, 2007. The Company also has outstanding $200 million unsecured, public debt
securities in the form of 9.375% Notes due August 1, 2039 which are callable
beginning on August 11, 2004.
During fiscal 2000, the Company entered into an agreement which provides
financing for software purchases and hardware leases primarily relating to the
Company's Great Renewal - Phase II supply chain and business process initiative
("GR II"). Presently, software purchases and hardware leases will be financed at
an effective rate of 8.49% per annum. Software purchases and hardware leases
will occur from time to time over the next four years. The Company currently
makes equal monthly payments of $1.4 million. Such payments are subject to
change based upon the timing and amount of such funding. As of February 24,
2001, $26.8 million was funded for software purchases and hardware with a total
fair market value of $10.7 million had been leased to the Company.
The Company's loan agreements and certain of its notes contain various
financial covenants which require, among other things, minimum fixed charge
coverage and maximum levels of leverage and capital expenditures. During the 4th
quarter of fiscal 2000 the Company negotiated the aforementioned Secured Credit
Agreement to replace its prior facility. This agreement includes covenants,
terms and conditions which reflect the Company's current operating performance
and capital programs. At February 24, 2001, the Company was in compliance with
the covenants on the notes and the Secured Credit Agreement.
The net book value of real estate pledged as collateral for all mortgage
loans amounted to approximately $4.5 million at February 24, 2001 and $8.8
million at February 26, 2000.
The U.S. bank borrowings of $195 million and $87 million are classified as
non-current as of February 24, 2001 and February 26, 2000, respectively, as the
Company has the ability and intent to refinance these borrowings on a long-term
basis.
The Company has filed two Shelf Registration Statements dated January 23,
1998 and June 23, 1999, allowing it to offer up to $350 million of debt and
equity securities as of February 24, 2001 at terms determined by market
conditions at the time of sale.
Maturities for the next five fiscal years and thereafter are: 2001 - $6.2
million; 2002 - $6.0 million; 2003 - $400.5 million; 2004 - $5.9 million; 2005 -
$2.3 million; 2006 and thereafter - $502.4 million. Interest payments on
indebtedness were approximately $80 million for fiscal 2000, $66 million for
fiscal 1999 and $56 million for fiscal 1998.
Note 6 - Fair Value of Financial Instruments
The estimated fair values of the Company's indebtedness are as follows:
Feb. 24, 2001 Feb. 26, 2000
-------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- --------- ---------
9.375% Notes, due August 1, 2039 $200,000 $161,280 $200,000 $175,000
7.75% Notes, due April 15, 2007 298,251 217,723 298,034 270,094
7.70% Senior Notes,
due January 15, 2004 200,000 160,000 200,000 188,250
7.78% Notes, due November 1, 2000 - - 75,000 74,438
Mortgages and Other Notes,
due 2001 through 2003 28,658 28,658 8,023 8,023
U.S. Bank Borrowings 194,607 194,607 87,000 87,000
------- ------- ------- -------
Total Indebtedness $921,516 $762,268 $868,057 $802,805
======== ======== ======== ========
Fair value for the public debt securities is based on quoted market prices.
As of February 24, 2001 and February 26, 2000, the carrying values of cash and
short-term investments, accounts receivable and accounts payable approximated
fair values due to the short-term maturities of these instruments.
As of the end of fiscal 2000, the Company holds equity securities of both
common and cumulative preferred stock in Isosceles PLC, which were written-off
in their entirety during fiscal 1992. There are no quoted market prices for
these securities and it is not practicable, considering the materiality of these
securities to the Company, to obtain an estimate of their fair value. The
Company believes that the fair value for these securities is zero based upon
Isosceles' current and prior years' results.
Note 7 - Lease Obligations
The Company operates primarily in leased facilities. Lease terms generally
range up to twenty-five years for store leases and thirty years for other leased
facilities, with options to renew for additional periods. The majority of the
leases contain escalation clauses relating to real estate tax increases and
certain store leases provide for increases in rentals when sales exceed
specified levels. In addition, the Company also leases some store equipment and
trucks.
The Consolidated Balance Sheets include the following:
Feb. 24, Feb. 26,
2001 2000
----------- ----------
Real property leased under capital leases $205,409 $207,117
Accumulated amortization (120,651) (112,971)
-------- --------
$ 84,758 $ 94,146
======== ========
During fiscal 2000, 1999 and 1998, the Company entered into new capital
leases totaling $7 million, $16 million and $12 million, respectively. These
capital lease amounts are non-cash transactions and, accordingly, have been
excluded from the Statements of Consolidated Cash Flows. Interest paid as part
of capital lease obligations was approximately $14 million in fiscal 2000, 1999
and 1998.
Rent expense for operating leases consists of:
52 Weeks Ended
----------------------------------
Feb. 24, Feb. 26, Feb. 27,
2001 2000 1999
-------- -------- --------
Minimum rentals $219,113 $194,158 $193,703
Contingent rentals 3,777 3,780 3,987
-------- -------- --------
$222,890 $197,938 $197,690
======== ======== ========
Future minimum annual lease payments for capital leases and noncancelable
operating leases in effect at February 24, 2001 are shown in the table below.
All amounts are exclusive of lease obligations and sublease rentals applicable
to facilities for which reserves have previously been established. In addition,
the Company subleases 68 stores to the franchise business. Included in the
operating lease table below are the rental payments made by the Company
partially offset by the rental income received from the franchised stores.
Capital
Leases
Real Operating
Fiscal Property Leases
- ------ --------- ----------
2001 $ 23,524 $ 238,281
2002 22,843 235,736
2003 20,685 226,964
2004 18,967 220,304
2005 14,880 214,063
2006 and thereafter 139,037 2,241,819
-------- ---------
239,936 $3,377,167
==========
Less executory costs (1,248)
--------
Net minimum rentals 238,688
Less interest portion (120,257)
---------
Present value of net minimum rentals $118,431
========
Note 8 - Income Taxes
The components of (loss) income before income taxes are as follows:
52 Weeks Ended
----------------------------------
Feb. 24, Feb. 26, Feb. 27,
2001 2000 1999
-------- -------- ---------
United States $(74,768) $ (77) $(244,573)
Canadian 35,095 27,080 15,289
-------- ------- --------
Total $(39,673) $27,003 $(229,284)
======== ======= =========
The (benefit from) provision for income taxes consists of the following:
52 Weeks Ended
----------------------------------
Feb. 24 Feb. 26, Feb. 27,
2001 2000 1999
---------- ---------- ----------
Current:
Federal $ - $ 872 $ -
Canadian 531 710 552
State and local 3,000 3,003 3,000
------- ------ --------
3,531 4,585 3,552
------- ------ --------
Deferred:
Federal (24,340) 121 (77,489)
Canadian 16,083 12,045 6,806
State and local (9,879) (3,908) (25,786)
Canadian valuation allowance - - (69,203)
------- ------ --------
(18,136) 8,258 (165,672)
------- ------ --------
(Benefit from) provision for
income taxes $(14,605) $12,843 $(162,120)
========= ======= =========
The deferred income tax (benefit) provision results primarily from the
annual change in temporary differences between amounts of assets and liabilities
for financial reporting purposes and such amounts as measured by tax laws, net
operating tax loss carryforwards and in fiscal 1998, the Canadian valuation
allowance.
The Company recorded an income tax benefit amounting to $14.6 million in
fiscal 2000 as compared to an income tax provision of $12.8 million for fiscal
1999 and an income tax benefit of $162.1 million for fiscal 1998. The fiscal
1998 benefit of $162 million includes reversals of the Canadian operations
deferred tax valuation allowance. During the first three quarters of fiscal
1998, the Company reversed approximately $9 million of the Canadian valuation
allowance to the extent that the Canadian operations had taxable income. In the
fourth quarter of fiscal 1998, the Company concluded that it was more likely
than not that the net deferred tax assets related to the Canadian operations
would be realized based upon Management's plan to close underperforming stores
in Canada (see Note 2 - Store and Facilities Exit Costs), the implementation of
certain tax strategies and the continued performance improvements of the
Canadian operations. Accordingly, the Company reversed the remaining portion of
the Canadian deferred tax valuation allowance amounting to approximately $60
million. The deferred tax benefit recorded for U.S. operations of approximately
$103 million mainly relates to book and tax differences of the store and
facilities exit costs recorded in fiscal 1998.
The Company has elected to permanently reinvest earnings of the Canadian
subsidiary. Accordingly, the Company does not provide for taxes associated with
Canada's undistributed earnings.
As of February 24, 2001, the Company had net operating tax loss
carryforwards of approximately $62 million from the Canadian operations and $170
million from the U.S. operations. The Canadian portion of the net operating loss
carryforwards will expire between February 2002 and February 2003 and the U.S.
portion will expire between February 2019 and February 2020. The Company has
assessed its ability to utilize its net operating loss carryforwards and has
concluded that no valuation allowance is required.
A reconciliation of income taxes at the 35% federal statutory income tax
rate for fiscal 2000, 1999 and 1998 to income taxes as reported is as follows:
52 Weeks Ended
----------------------------------
Feb. 24, Feb. 26, Feb. 27,
2001 2000 1999
---------- ---------- ----------
Income taxes computed at federal
statutory income tax rate $(13,886) $9,451 $(80,249)
State and local income taxes, net of
federal tax benefit (4,471) (588) (14,810)
Tax rate differential relating
to Canadian operations 4,330 3,278 2,007
Canadian valuation allowance - - (69,203)
Goodwill and other permanent
differences (578) 702 135
------- ------ --------
Income taxes, as reported $(14,605) $12,843 $(162,120)
======== ======= =========
Income tax payments, net of refunds, for fiscal 2000, 1999 and 1998 were
approximately $2 million, $6 million and $2 million, respectively.
The components of net deferred tax assets (liabilities) are as follows:
Feb. 24, Feb. 26,
2001 2000
--------- ---------
Current assets:
Insurance reserves $ 27,073 $ 31,073
Other reserves and accrued benefits 40,435 40,659
Accrued postretirement and
postemployment benefits 1,111 1,406
Lease obligations 1,198 1,315
Pension obligations 1,776 4,241
Miscellaneous 4,505 6,612
--------- ---------
76,098 85,306
--------- ---------
Current liabilities:
Inventories (9,482) (15,561)
Health and welfare (9,631) (9,841)
Miscellaneous (2,751) (5,693)
--------- ---------
(21,864) (31,095)
--------- ---------
Deferred income taxes included in prepaid
expenses and other current assets $ 54,234 $ 54,211
========= =========
Non-current assets:
Isosceles investment $ 42,617 $ 42,617
Alternative minimum tax 7,500 7,500
Fixed assets - 459
Other reserves 55,583 56,372
Lease obligations 13,193 14,530
Net operating loss carryforwards 107,862 75,417
Insurance reserves 8,400 4,200
Accrued postretirement and
postemployment benefits 28,259 31,035
Pension obligations 9,503 4,140
Step rents 19,526 15,098
Miscellaneous 768 7,364
--------- ---------
293,211 258,732
--------- ---------
Non-current liabilities:
Fixed assets (254,907) (244,050)
Pension obligations (23,205) (20,807)
Miscellaneous (2,463) (2,352)
--------- ---------
(280,575) (267,209)
--------- ---------
Net non-current deferred income tax
asset (liability) $ 12,636 (8,477)
========== ===========
The net non-current deferred tax asset and liability is recorded in the
Consolidated Balance Sheets as follows:
Feb. 24, Feb. 26,
2001 2000
--------- ---------
Other assets $ 32,995 $ 49,992
Non-current liability (20,359) (58,469)
--------- ---------
Net non-current deferred income tax
asset (liability) $ 12,636 $ (8,477)
========== ==========
Note 9 - Retirement Plans and Benefits
Defined Benefit Plans
The Company provides retirement benefits to certain non-union and union
employees under various defined benefit plans. The Company's defined benefit
pension plans are non-contributory and benefits under these plans are generally
determined based upon years of service and, for salaried employees,
compensation. The Company funds these plans in amounts consistent with the
statutory funding requirements.
During fiscal 1998, the Company adopted SFAS No. 132, "Employers'
Disclosure about Pension and Postretirement Benefits" ("SFAS 132"). SFAS 132
standardizes the disclosure requirements for pension and other postretirement
benefits. This Statement addresses disclosure only. It does not address expense
recognition or liability measurement. Accordingly, there was no effect on
financial position or net income as a result of adopting SFAS 132.
The components of net pension cost are as follows:
52 Weeks Ended
----------------------------------
Feb. 24, Feb. 26, Feb. 27,
2001 2000 1999
---------- ---------- ----------
Service cost $ 8,017 $16,153 $14,014
Interest cost 19,192 26,300 25,872
Expected return on plan assets (25,429) (34,890) (32,040)
Amortization of unrecognized net asset (1,255) (1,194) (1,184)
Amortization of unrecognized net prior
service cost 910 1,240 1,237
Amortization of unrecognized net
actuarial (gain) loss (1,432) 730 506
Curtailments and settlements 668 1,205 863
------- ------ ------
Net pension cost $ 671 $9,544 $9,268
======= ====== ======
The Company's defined benefit pension plans are accounted for on a calendar
year basis. The majority of plan assets is invested in listed stocks and bonds.
The following tables set forth the change in benefit obligations and change in
plan assets for fiscal 2000 and 1999 for the Company's defined benefit plans:
Change in Benefit Obligation 2000 1999
- ---------------------------- -------- --------
Benefit obligation - beginning of year $393,614 $423,156
Service cost 8,017 16,153
Interest cost 19,192 26,300
Actuarial loss (gain) 12,467 (60,065)
Benefits paid (23,399) (26,195)
Amendments 29 1,721
Curtailments and settlements (122,633) 1,182
Effect of exchange rate (12,668) 11,362
------- -------
Benefit obligation - end of year $274,619 $393,614
======== ========
Change in Plan Assets
- ---------------------
Plan assets at fair value - beginning of year $464,438 $458,663
Actual return on plan assets 53,441 9,023
Company contributions 5,218 9,865
Benefits paid (23,399) (26,195)
Curtailments and settlements (136,981) -
Effect of exchange rate (15,937) 13,082
------- -------
Plan assets at fair value - end of year $346,780 $464,438
======== ========
Amounts recognized in the Company's Consolidated Balance Sheets consist of
the following:
2000 1999
--------- ---------
Plan assets in excess of projected
benefit obligation $ 72,161 $ 70,824
Unrecognized net transition asset (1,881) (3,013)
Unrecognized prior service cost 2,419 6,262
Unrecognized net actuarial gain (56,231) (43,891)
Interim contributions between calendar
and fiscal year end 268 -
-------- -------
Total recognized in the Consolidated
Balance Sheets $16,736 $30,182
======== =======
Prepaid benefit cost $44,592 $56,529
Accrued benefit liability (28,036) (31,504)
Intangible asset 116 236
Accumulated other comprehensive loss 38 2,729
Tax benefit 26 2,192
------- -------
Total recognized in the Consolidated
Balance Sheets $16,736 $30,182
======= =======
Plans with accumulated benefit obligation in excess of plan assets consist of
the following:
2000 1999
--------- ---------
Accumulated benefit obligation $21,998 $92,973
Projected benefit obligation $22,705 $97,114
Plan assets at fair value $ 275 $69,480
The prepaid pension asset is included in "Other assets" while the pension
liability is included in "Accrued salaries, wages and benefits" and "Other
non-current liabilities".
At February 24, 2001 and February 26, 2000, the Company's additional
minimum pension liability for its defined benefit plans was in excess of the
unrecognized prior service costs and net transition obligation and accordingly,
less than $0.1 million and $2.7 million, each net of income tax benefit, was
reflected as a reduction to stockholders' equity, respectively.
During the year ended February 25, 1995, the Company's Canadian subsidiary
and the United Food & Commercial Workers International Union, Locals 175 and
633, entered into an agreement resulting in the amalgamation of three of the
Company's Canadian defined benefit pension plans with the Canadian Commercial
Workers Industry Pension Plan ("CCWIPP"), retroactive to July 1, 1994. The
agreement was subject to the approval of the CCWIPP trustees and the appropriate
regulatory bodies. During the first quarter of fiscal 2000, the Company received
final approval of the agreement. Under the terms of this agreement and as
reflected in the above tables, CCWIPP assumed the assets and defined benefit
liabilities of the three pension plans. Further, the Company is required to make
defined contributions to CCWIPP based upon hours worked by employees who are
members of CCWIPP and to the extent assets transferred exceeded liabilities
assumed, the Company received a funding holiday by CCWIPP for such defined
contributions. As a result of this transfer, during the first quarter of fiscal
2000, the Company recorded a $0.4 million net expense and a $2.7 million
adjustment to the minimum pension liability.
Actuarial assumptions used to determine year-end plan status are as
follows:
2000 1999
------------------ ---------------
U.S. Canada U.S. Canada
--------- ------ ------ ------
Weighted average discount rate 7.50% 7.00% 7.75% 7.50%
Weighted average rate of compensation
increase 4.50% 4.00% 4.75% 4.00%
Expected long-term rate of return
on plan assets 7.50-8.50% 8.50% 8.75% 8.40%
The impact of the changes in the actuarial assumptions has been reflected
in the funded status of the pension plans and the Company believes that such
changes will not have a material effect on net pension cost for fiscal 2001.
Defined Contribution Plans
The Company maintains a defined contribution retirement plan to which the
Company contributes an amount equal to 4% of eligible participants' salaries and
a savings plan to which eligible participants may contribute a percentage of
eligible salary. The Company contributes to the savings plan based on specified
percentages of the participants' eligible contributions. Participants become
fully vested in the Company's contributions after 5 years of service. The
Company's contributions charged to operations for both plans were approximately
$11.3 million, $10.8 million and $10.9 million in fiscal years 2000, 1999 and
1998, respectively.
Multi-employer Union Pension Plans
The Company participates in various multi-employer union pension plans
which are administered jointly by management and union representatives and which
sponsor most full-time and certain part-time union employees who are not covered
by the Company's other pension plans. The pension expense for these plans
approximated $35.3 million, $31.5 million and $34.1 million in fiscal 2000, 1999
and 1998, respectively. The Company could, under certain circumstances, be
liable for unfunded vested benefits or other expenses of jointly administered
union/management plans. At this time, the Company has not established any
liabilities for future withdrawals because such withdrawals from these plans are
not probable.
Postretirement Benefits
The Company provides postretirement health care and life benefits to
certain union and non-union employees. The Company recognizes the cost of
providing postretirement benefits during employees' active service period.
The components of net postretirement benefits cost are as follows:
52 Weeks Ended
----------------------------------
Feb. 24, Feb. 26, Feb. 27,
2001 2000 1999
---------- ---------- ----------
Service cost $ 487 $ 548 $ 1,666
Interest cost 2,060 1,977 3,464
Prior service cost (1,347) (1,347) (263)
Amortization of (gain) loss (692) (509) 27
------ ------- -------
Net postretirement benefits cost $ 508 $ 669 $ 4,894
====== ======= =======
The unfunded status of the plans is as follows:
52 Weeks Ended
----------------------------------
Feb. 24, Feb. 26, Feb. 27,
2001 2000 1999
---------- ---------- ----------
Unfunded accumulated benefit obligation
at beginning of year $28,190 $36,690 $48,980
Service cost 487 548 1,666
Interest cost 2,060 1,977 3,464
Benefits paid (1,937) (1,782) (2,790)
Actuarial loss (gain) 6,131 (9,533) 1,837
Plan amendment - - (16,162)
Foreign exchange (1,218) 290 (305)
------ ------ ------
Accumulated benefit obligation at end of year 33,713 28,190 36,690
Unrecognized net gain from experience
differences 2,658 9,191 221
Unrecognized prior service cost 13,715 14,552 15,899
------ ------ ------
Accrued postretirement benefit costs at
end of year $50,086 $51,933 $52,810
======= ======= =======
Assumed discount rate:
U.S. 7.50% 7.75% 6.50%
Canada 7.00% 7.50% 6.50%
The assumed rate of future increase in health care benefit cost for fiscal
2000 was 8.75% and is expected to decline to 5.0% by the year 2020 and remain at
that level thereafter. The effect of a 1% change in the assumed health care cost
trend rate for each future year on the net postretirement health care cost would
either increase by $0.3 million or decrease by $0.2 million, while the
accumulated postretirement benefit obligation would either increase by $3.0
million or decrease by $2.4 million.
Postemployment Benefits
The Company accrues costs for preretirement, postemployment benefits
provided to former or inactive employees and recognizes an obligation for these
benefits. The costs of these benefits have been included in operations for each
of the three fiscal years in the period ended February 24, 2001. As of February
24, 2001 and February 26, 2000, the Company has a liability reflected in the
Consolidated Balance Sheets of $23.6 million and $24.8 million, respectively,
related to such benefits.
Note 10 - Stock Options
At February 24, 2001, the Company has four fixed stock-based compensation
plans. The Company applies the principles of APB 25 for stock options and FASB
Interpretation No. 28 for Stock Appreciation Rights ("SAR's"). SAR's allow the
holder, in lieu of purchasing stock, to receive cash in an amount equal to the
excess of the fair market value of common stock on the date of exercise over the
option price. Most of the options and SAR's vest over a four year period on the
anniversary date of issuance, while some options vest immediately.
Effective July 13, 1999, the Board of Directors and stockholders approved
the 1998 Long Term Incentive and Share Award Plan (the "1998 Plan") for its
officers and key employees. The 1998 Plan provides for the granting of 5,000,000
shares as options, SAR's or stock awards.
The Company's 1994 Stock Option Plan (the "1994 Plan") for officers and key
employees provided for the granting of 1,500,000 shares as either options or
SAR's. The 1984 Stock Option Plan for officers and key employees, which expired
on February 1, 1994, provided for the granting of 1,500,000 shares and was
amended as of July 10, 1990 to increase by 1,500,000 the number of options
available for grant as either options or SAR's.
The 1994 Stock Option Plan for Board of Directors provides for the granting
of 100,000 stock options at the fair market value of the Company's common stock
at the date of grant. Options granted under this plan totaled 8,000 in fiscal
2000, 3,600 in fiscal 1999 and 1,600 in fiscal 1998.
Options and SAR's issued under all of the Company's plans are granted at
the fair market value of the Company's common stock at the date of grant. In
fiscal 2000, 1,490,550 options were granted under the 1998 Plan. There were no
SAR's granted during fiscal 2000.
The Company accounts for stock options using the intrinsic value-based
method prescribed by APB 25. Had compensation cost for the Company's stock
options been determined based on the fair value at the grant dates for awards
under those plans consistent with the fair value methods prescribed by SFAS 123,
the Company's net (loss) income and (loss) income per share would have been
reduced to the pro forma amounts indicated below:
52 Weeks Ended
----------------------------------
Feb. 24, Feb. 26, Feb. 27,
2001 2000 1999
---------- --------- ----------
Net (loss) income:
As reported $(25,068) $14,160 $(67,164)
Pro forma $(29,211) $11,275 $(68,987)
Net (loss) income per share - basic and diluted:
As reported $ (0.65) $ 0.37 $ (1.75)
Pro forma $ (0.76) $ 0.29 $ (1.80)
The pro forma effect on net (loss) income and (loss) income per share may
not be representative of the pro forma effect in future years because it
includes compensation cost on a straight-line basis over the vesting periods of
the grants and does not take into consideration the pro forma compensation costs
for grants made prior to fiscal 1995.
The fair value of the fiscal 2000, 1999 and 1998 option grants was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
52 Weeks Ended
------------------------------------------
Feb. 24, Feb. 26, Feb. 27,
2001 2000 1999
------------ ------------ ------------
Expected life 7 years 7 years 7 years
Volatility 60% 30% 30%
Dividend yield range 0%-4.60% 1.08%-1.42% 1.23%-1.63%
Risk-free interest rate range 4.94%-6.69% 5.37%-6.78% 5.14%-5.63%
For fiscal 2000, no expense was recorded with respect to SAR's due to the
decline in the Company's stock price. For fiscal 1999, the Company recognized a
$3.1 million credit to reverse previously accrued SAR compensation charges due
to the decline in the Company's stock price. The Company recognized compensation
expense of $0.6 million in fiscal 1998, with respect to SAR's. There was no
compensation expense recognized for the other fixed plans since the exercise
price of the stock options equaled the fair market value of the Company's common
stock on the date of grant.
A summary of option transactions is as follows:
Officers, Key Employees and Directors
- -------------------------------------
Weighted
Average
Exercise
Shares Price
--------- ---------
Outstanding February 29, 1998 949,950 $ 27.78
Granted 897,600 31.32
Cancelled or expired (10,000) 27.88
Exercised (37,750) 27.88
--------- -------
Outstanding February 27, 1999 1,799,800 $ 29.55
Granted 491,650 32.35
Cancelled or expired (211,000) 29.69
Exercised (56,500) 26.64
--------- -------
Outstanding February 26, 2000 2,023,950 $ 30.30
Granted 1,498,550 16.11
Cancelled or expired (277,836) 26.88
--------- -------
Outstanding February 24, 2001 3,244,664 $ 24.04
========= =======
Exercisable at:
February 26, 2000 811,450 $ 28.61
February 24, 2001 1,046,205 $ 29.55
Following are the weighted average fair values of options granted during
the years ended:
February 27, 1999 $11.72
February 26, 2000 $12.64
February 24, 2001 $ 8.80
A summary of stock options outstanding and exercisable at February 24, 2001
is as follows:
Weighted
Options Average Weighted Options Weighted
Average Range Outstanding Remaining Average Exercisable Average
of Exercise at Contractual Exercise at Exercise
Prices 2/24/01 Life Price 2/24/01 Price
- ------------- ----------- ------------ ----------- --------- ---------
$7.44-$10.87 277,000 9.8 years $7.99 - -
$15.78-$18.88 1,163,600 9.1 years $17.95 - -
$21.50-$25.88 26,000 4.6 years $23.40 26,000 $23.40
$26.50-$27.44 61,400 5.8 years $27.08 48,900 $27.05
$27.63-$27.75 116,000 5.4 years $27.73 91,000 $27.73
$27.88 366,500 4.3 years $27.88 366,500 $27.88
$28.25-$30.00 38,000 8.8 years $28.91 9,666 $28.93
$30.25-$31.75 788,250 7.8 years $31.41 399,375 $31.41
$32.88-$37.00 407,914 8.1 years $32.69 104,764 $32.69
--------- ---------
3,244,664 1,046,205
========= =========
A summary of SAR transactions is as follows:
Officers and Key Employees
- --------------------------
Price Range
Shares Per Share
----------- ---------------
Outstanding February 29, 1998 1,657,988 $21.88 - $65.13
Cancelled or expired (388,625) 27.45 - 46.38
Exercised (89,644) 21.88 - 27.25
-------- ---------------
Outstanding February 27, 1999 1,179,719 $21.88 - $65.13
Cancelled or expired (212,250) 23.38 - 65.13
Exercised (84,707) 21.88 - 27.25
-------- ---------------
Outstanding February 26, 2000 882,762 $21.88 - $52.38
Cancelled or expired (375,000) 24.75 - 52.38
-------- ---------------
Outstanding February 24, 2001 507,762 $21.88 - $45.38
======== ===============
Exercisable at:
February 26, 2000 866,137 $21.88 - $52.38
February 24, 2001 506,512 $21.88 - $45.38
Note 11 - Litigation
On January 13, 2000, the Attorney General of the State of New York filed an
action in New York Supreme Court, County of New York, alleging that the Company
and its subsidiary Shopwell, Inc., together with the Company's outside delivery
service Chelsea Trucking, Inc., violated New York law by failing to pay minimum
and overtime wages to individuals who deliver groceries at a Food Emporium store
in New York City. The complaint seeks a determination of violation of law, an
unspecified amount of restitution, an injunction and costs. A purported class
action lawsuit was filed on January 13, 2000 in the federal district court for
the Southern District of New York against the Company, Shopwell, Inc. and others
by Faty Ansoumana and others. The federal court action makes similar minimum
wage and overtime pay allegations under both federal and state law and extends
the allegations to various stores operated by the Company. In December 2000, the
plaintiffs in the federal court action accepted a $3 million offer of judgment
made by the Company, such offer being conditional upon the federal court
entering an order certifying a class consisting of the individuals who are the
subject of a pending motion by the plaintiffs for class certification. Such
amount has been accrued for and is included in "Other accruals" on the Company's
Consolidated Balance Sheets. In the event the Court enters the class
certification order, this judgment will also resolve all related claims of the
New York Attorney General.
The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
While the outcome of these claims cannot be predicted with certainty, management
does not believe that the outcome of any of these legal matters will have a
material adverse effect on the Company's consolidated results of operations,
financial position or cash flows.
Note 12 - Supply Chain and Business Process Initiative-Great Renewal-Phase II
On March 13, 2000, the Company announced GR II, an initiative to develop a
state-of-the-art supply and business management infrastructure. As of February
24, 2001, the Company has committed to, but has not yet incurred, approximately
$23 million of software purchases and consulting services, which will be payable
in fiscal 2001.
During fiscal 2000, an agreement was entered into which provides
financing for software purchases and hardware leases primarily relating to GR
II. Presently, software purchases and hardware leases will be financed at an
effective rate of 8.49% per annum. Software purchases and hardware leases will
occur from time to time over the next four years. Equal monthly payments of $1.4
million are currently being made. Such payments are subject to change based upon
the timing and amount of such funding. As of February 24, 2001, $26.8 million
was funded for software purchases and hardware with a total fair market value of
$10.7 million had been leased. The leasing of the hardware under this agreement
is being accounted for as an operating lease in accordance with SFAS No. 13,
"Accounting for Leases".
Note 13 - Operating Segments
During the fourth quarter of fiscal 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). This statement establishes standards for reporting information about
operating segments in annual financial statements and selected information in
interim financial statements. It also establishes standards for related
disclosures about products and services and geographic areas. Operating segments
are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision maker is the Chief Executive
Officer.
The Company currently operates in three reportable segments: United States
Retail, Canada Retail and Canada Wholesale. The retail segments are comprised of
retail supermarkets in the United States and Canada, while the Wholesale segment
is comprised of the Company's Canadian operation that serves as exclusive
wholesaler to the Company's franchised stores and serves as wholesaler to
certain third party retailers.
The accounting policies for the segments are the same as those described in
the summary of significant accounting policies. The Company measures segment
performance based upon operating profit.
Information on segments is as follows:
52 Weeks Ended
---------------------------------------
Feb. 24, Feb. 26, Feb. 27,
2001 2000 1999
------------ ------------ ------------
Sales
U.S. Retail $ 8,247,224 $ 7,981,134 $ 8,276,493
Canada Retail 1,745,129 1,646,712 1,515,602
Canada Wholesale 630,513 523,488 387,263
----------- ----------- -----------
Total Company $10,622,866 $10,151,334 $10,179,358
=========== =========== ===========
Depreciation and amortization
U.S. Retail $ 223,550 $ 204,975 $ 209,656
Canada Retail 32,221 27,413 23,990
Canada Wholesale - 324 17
----------- ----------- ----------
Total Company $ 255,771 $ 232,712 $ 233,663
=========== =========== ==========
Income (loss) from operations
U.S. Retail $ 6,866 $ 69,703 $ (186,558)
Canada Retail 19,676 17,029 11,317
Canada Wholesale 23,651 18,098 10,850
----------- ----------- ----------
Total Company $ 50,193 $ 104,830 $ (164,391)
=========== =========== ==========
Interest expense
U.S. Retail $ (81,684) $ (70,097) $ (58,389)
Canada Retail (11,436) (11,504) (11,485)
Canada Wholesale (2,968) (2,444) (1,623)
----------- ----------- ----------
Total Company $ (96,088) $ (84,045) $ (71,497)
=========== =========== ==========
Interest income
U.S. Retail $ 50 $ 317 $ 876
Canada Retail 2,099 2,521 2,686
Canada Wholesale 4,073 3,380 3,042
----------- ----------- ----------
Total Company $ 6,222 $ 6,218 $ 6,604
=========== =========== ==========
(Loss) income before income taxes
U.S. Retail $ (74,768) $ (77) $ (244,071)
Canada Retail 10,339 8,046 2,518
Canada Wholesale 24,756 19,034 12,269
----------- ----------- ----------
Total Company $ (39,673) $ 27,003 $ (229,284)
=========== =========== ==========
Capital expenditures
U.S. Retail $ 356,850 $ 416,863 $ 376,688
Canada Retail 58,992 61,444 61,657
Canada Wholesale - 1,265 -
----------- ----------- ----------
Total Company $ 415,842 $ 479,572 $ 438,345
=========== =========== ==========
Total assets
U.S. Retail $ 2,679,217 $ 2,684,624 $2,601,113
Canada Retail 548,801 567,573 504,926
Canada Wholesale 81,785 83,328 54,775
----------- ----------- ----------
Total Company $ 3,309,803 $ 3,335,525 $3,160,814
=========== =========== ==========
Long-lived assets
United States $ 1,637,036 $ 1,652,094 $1,528,249
Canada 287,211 265,818 204,687
----------- ----------- ----------
Total Company $ 1,924,247 $ 1,917,912 $1,732,936
=========== =========== ==========
Note 14 - Sale-Leaseback Transaction
On December 29, 2000 and February 16, 2001, the Company sold 12 properties
and simultaneously leased them back from the purchaser. The properties subject
to this sale had a carrying value of approximately $68 million. Net proceeds
received by the Company related to this transaction amounted to approximately
$113 million. Of the 12 properties sold, 11 were sold for a profit resulting in
a gain after deducting expenses of approximately $46 million. This gain will be
deferred and amortized over the life of the respective leases as a reduction of
rental expense. One property in the aforementioned transaction was sold at a
loss of approximately $3 million after expenses. Since the fair value of this
property was less than its carrying value, the Company recognized this loss in
full during fiscal 2000. During fiscal 2001, the Company has or expects to enter
into similar transactions with six other owned properties. During fiscal 2000,
the Company recognized a loss of approximately $4 million related to one of
these additional sale-leaseback properties which has occurred since the carrying
value of such property exceeded its fair value.
The resulting leases of the 12 properties sold in fiscal 2000 have terms of
20 years, with options to renew for additional periods, and are being accounted
for as operating leases in accordance with SFAS No. 13, "Accounting for Leases".
Future minimum lease payments for these operating leases are as follows:
Fiscal
------
2001 $12,840
2002 12,840
2003 12,840
2004 12,840
2005 12,840
2006 and thereafter 204,963
-------
Total $269,163
========
Note 15 - Environmental Liability
During the first quarter of fiscal 2000, the Company became aware of
environmental issues at one of its non-retail real estate locations. The Company
obtained an environmental remediation report to enable it to assess the
potential environmental liability related to this property. Factors considered
in determining the liability included, among others, whether the Company had
been designated as a potentially responsible party, the number of potentially
responsible parties designated at the site, the stage of the proceedings and the
available environmental technology.
During the first quarter of fiscal 2000, the Company assessed the
likelihood that a loss had been incurred at this site as probable and based on
findings included in remediation reports and discussion with legal counsel,
estimated the potential loss to be approximately $3 million on an undiscounted
basis. Accordingly, such amount was accrued at that time. At each balance sheet
date the Company assesses its exposure with respect to this environmental
remediation based on current available information. Subsequently, during fiscal
2000, with respect to such review, it was determined that additional costs
amounting to approximately $1.3 million would be incurred to remedy these
environmental issues, and accordingly, this additional amount was accrued. The
total accrued liability of approximately $4.3 million is included in "Other
non-current liabilities" in the Consolidated Balance Sheets.
Summary of Quarterly Results
- ----------------------------
(unaudited)
The following table summarizes the Company's results of operations by quarter
for fiscal 2000 and 1999. The first quarter of each fiscal year contains sixteen
weeks, while the other quarters each contain twelve weeks.
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------- ----------- ----------- ----------- -----------
(Dollars in thousands, except per share and store data)
2000
Sales $3,199,820 $2,439,534 $2,428,790 $2,554,722 $10,622,866
Gross margin 919,345 704,253 688,560 716,258 3,028,416
Depreciation
and amortization 76,648 58,803 59,596 60,724 255,771
Income (loss) from
operations 37,813 12,409 (2,184) 2,155 50,193
Interest expense 28,936 22,132 23,240 21,780 96,088
Net income (loss) 5,584 (5,374) (14,513) (10,765) (25,068)
Per share data:
Net income (loss) -
basic and diluted 0.15 (0.14) (0.38) (0.28) (0.65)
Cash dividends 0.10 0.10 0.10 - 0.30
Market price:
High 24.06 17.88 11.50 11.85
Low 17.41 12.06 9.13 6.25
Number of stores at end
of period 749 750 751 752
Number of franchised stores
served at end of period 63 67 68 68
1999
Sales $3,113,722 $2,284,380 $2,332,128 $2,421,104 $10,151,334
Gross margin 871,589 661,301 676,288 698,438 2,907,616
Depreciation and
amortization 69,966 52,336 54,306 56,104 232,712
(Loss) income from
operations (9,710) 26,368 56,084 32,088 104,830
Interest expense 24,394 17,910 20,308 21,433 84,045
Net (loss) income (19,546) 5,378 21,354 6,974 14,160
Per share data:
Net (loss) income -
basic and diluted (0.51) 0.14 0.56 0.18 0.37
Cash dividends 0.10 0.10 0.10 0.10 0.40
Market price:
High 34.25 37.38 36.94 28.88
Low 29.13 32.06 25.44 23.38
Number of stores at end
of period 759 749 758 750
Number of franchised stores
served at end of period 57 62 62 65
Management's Report on Financial Statements
- -------------------------------------------
The Management of The Great Atlantic & Pacific Tea Company, Inc. has prepared
the consolidated financial statements and related financial data contained in
this Annual Report. The financial statements were prepared in accordance with
generally accepted accounting principles appropriate to the business and, by
necessity and circumstance, include some amounts which were determined using
Management's best judgments and estimates with appropriate consideration to
materiality. Management is responsible for the integrity and objectivity of the
financial statements and other financial data included in this report. To meet
this responsibility, Management maintains a system of internal accounting
controls to provide reasonable assurance that assets are safeguarded and that
accounting records are reliable. Management supports a program of internal
audits and internal accounting control reviews to provide reasonable assurance
that the system is operating effectively.
The Board of Directors pursues its responsibility for reported financial
information through its Audit Review Committee. The Audit Review Committee meets
periodically and, when appropriate, separately with Management, internal
auditors and the independent auditors, Deloitte & Touche LLP, to review each of
their respective activities.
/s/Christian W.E. Haub
Chairman of the Board,
President and Chief Executive Officer
/s/Fred Corrado
Vice Chairman of the Board,
Chief Financial Officer
Independent Auditors' Report
- ----------------------------
To the Stockholders and Board of Directors of The Great Atlantic & Pacific Tea
Company, Inc.:
We have audited the accompanying consolidated balance sheets of The Great
Atlantic & Pacific Tea Company, Inc. and its subsidiary companies as of February
24, 2001 and February 26, 2000 and the related statements of consolidated
operations, consolidated stockholders' equity and comprehensive (loss) income,
and consolidated cash flows for each of the three fiscal years in the period
ended February 24, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Great Atlantic & Pacific Tea
Company, Inc. and its subsidiary companies at February 24, 2001 and February 26,
2000 and the results of their operations and their cash flows for each of the
three fiscal years in the period ended February 24, 2001 in conformity with
accounting principles generally accepted in the United States of America.
/s/Deloitte & Touche LLP
Parsippany, New Jersey
April 5, 2001
Five Year Summary of Selected Financial Data
- --------------------------------------------
Fiscal 2000 Fiscal 1999 Fiscal 1998 Fiscal 1997 Fiscal 1996
(52 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks)
----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except share and per share amounts,
store data, and financial ratios)
Operating Results
Sales $10,622,866 $10,151,334 $10,179,358 $10,262,243 $10,089,014
Income (loss) from
operations 50,193 104,830 (164,391) 155,259 169,303
Depreciation and
amortization (255,771) (232,712) (233,663) (234,236) (230,748)
Interest expense (96,088) (84,045) (71,497) (80,152) (73,208)
(Loss) income before
extraordinary item (25,068) 14,160 (67,164) 63,586 73,032
Extraordinary loss
on early
extinguishment of debt - - - (544) -
Net (loss) income (25,068) 14,160 (67,164) 63,042 73,032
Per Share Data
(Loss) income before
extraordinary item -
basic and diluted (0.65) 0.37 (1.75) 1.66 1.91
Extraordinary loss on
early extinguishment of
debt - basic and diluted - - - (0.01) -
Net (loss) income - basic
and diluted (0.65) 0.37 (1.75) 1.65 1.91
Cash dividends 0.30 0.40 0.40 0.40 0.20
Book value per share 20.79 22.07 21.87 24.22 23.27
Financial Position
Current assets 1,201,854 1,222,883 1,243,110 1,217,227 1,231,379
Current liabilities 1,107,484 1,124,578 1,134,063 955,130 1,016,005
Working capital 94,370 98,305 109,047 262,097 215,374
Current ratio 1.09 1.09 1.10 1.27 1.21
Expenditures for
property 415,842 479,572 438,345 267,623 296,878
Total assets 3,309,803 3,335,525 3,160,814 2,995,253 3,002,672
Current portion of
long-term debt 6,195 2,382 4,956 16,824 18,290
Current portion of
capital lease
obligations 11,634 11,327 11,483 12,293 12,708
Long-term debt 915,321 865,675 728,390 695,292 701,609
Long-term portion of
capital lease
obligations 106,797 117,870 115,863 120,980 137,886
Total debt 1,039,947 997,254 860,692 845,389 870,493
Debt to total
capitalization 57% 54% 51% 48% 49%
Equity
Stockholders' equity 797,297 846,192 837,257 926,632 890,072
Weighted average
shares outstanding 38,347,216 38,330,379 38,273,859 38,249,832 38,221,329
Number of registered
stockholders 6,281 6,890 7,419 8,029 8,808
Other
Number of employees 83,000 80,900 83,400 79,980 84,000
New store openings 47 54 46 40 30
Number of stores at
year end 752 750 839 936 973
Total store area
(square feet) 27,931,729 26,904,331 28,736,319 30,574,286 30,587,324
Number of franchised
stores served at
year end 68 65 55 52 49
Total franchised store
area (square feet) 2,021,206 1,908,271 1,537,388 1,389,435 1,345,786
Executive Officers and Operating Management
- -------------------------------------------
Management Executive Committee
Christian W.E. Haub
Chairman of the Board,
President and Chief Executive Officer
Fred Corrado
Vice Chairman of the Board,
Chief Financial Officer
Elizabeth Culligan
Executive Vice President,
Chief Operating Officer
William Costantini
Senior Vice President,
General Counsel & Secretary
Mitchell P. Goldstein
Senior Vice President,
Finance & Treasurer
Nicholas Ioli, Jr.
Senior Vice President,
Chief Information Officer
Laurane Magliari
Senior Vice President,
People Resources and Services
Brian Pall
Senior Vice President,
Chief Development Officer
Donald J. Sommerville
Senior Vice President,
Chief Marketing Officer
Senior Operating Management
ATLANTIC REGION
Craig Sturken
President and Chief Executive Officer
MIDWEST REGION
Dennis Eidson
President and Chief Executive Officer
SOUTHERN REGION
Karen Stout
Group President
A&P CANADA
Brian Piwek
Vice Chairman, President and Chief Executive Officer
Board Of Directors
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Christian W.E. Haub (c)(d)
Chairman of the Board, President and
Chief Executive Officer
John D. Barline, Esq. (b)(c)(e)
Williams, Kastner & Gibbs LLP,
Tacoma, Washington
Rosemarie Baumeister (b)
Executive Vice President,
Tengelmann Warenhandelsgesellschaft,
Muelheim, Germany
Fred Corrado (c)(d)
Vice Chairman of the Board,
Chief Financial Officer
Bobbie Gaunt (a)(b)
Former President and CEO,
Ford Motor Company of Canada
Helga Haub (c)(d)
Dan Kourkoumelis (a)(c)(e)
Former President and CEO,
Quality Food Centers, Inc.
Edward Lewis (d)(c)(e)
Chairman and Chief Executive Officer
Essence Communications, Inc.
Richard L. Nolan (a)(c)(e)
William Barclay Harding Professor of Management Technology
at the Harvard Business School and member of the Board of Directors for
Novell, Surebridge Technologies, and Zefer
Maureen B. Tart-Bezer (a)(d)
Executive Vice President & General Manager
American Express Company, U.S. Consumer
Charge Group
R.L. "Sam" Wetzel (a)(b)(d)
President and Chief
Executive Officer,
Wetzel International, Inc.
(a) Member of
Audit Review Committee
Richard L. Nolan, Chairman
(b) Member of
Compensation Committee
John D. Barline, Chairman
(c) Member of Executive Committee
Christian W.E. Haub, Chairman
(d) Member of Finance Committee
R.L. "Sam" Wetzel, Chairman
(e) Member of Governance Committee
Dan Kourkoumelis, Chairman
Stockholder Information
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Executive Offices
Box 418
2 Paragon Drive
Montvale, NJ 07645
Telephone 201-573-9700
Independent Auditors
Deloitte & Touche LLP
Two Hilton Court
Parsippany, NJ 07054
Stockholder Inquiries and Publications
Stockholders, security analysts, members of the media and others interested in
further information about the Company are invited to contact the Investor
Relations Help Line at 201-571-4537.
Internet users can access information on A&P at: www.aptea.com
Correspondence concerning stockholder address changes or other stock account
matters should be directed to the Company's Transfer Agent & Registrar:
American Stock Transfer and Trust Company
40 Wall Street
New York, NY 10005
Telephone 800-937-5449
Form 10-K
Copies of Form 10-K filed with the Securities and Exchange Commission will be
provided to stockholders upon written request to the Secretary at the Executive
Offices in Montvale, New Jersey.
Annual Meeting
The Annual Meeting of Stockholders will be held at 9:00 a.m. (EDT) on Wednesday,
July 18, 2001 Hampton Inn 4529 Highway One Rehoboth Beach, Delaware.
Common Stock
Common stock of the Company is listed and traded on the New York Stock Exchange
under the ticker symbol "GAP" and has unlisted trading privileges on the Boston,
Midwest, Philadelphia, Cincinnati, and Pacific Stock Exchanges. The stock is
generally reported in newspapers and periodical tables as "GtAtPc".
Financial Calendar
Estimated Date of Announcement of Quarterly Results:
1st quarter ended June 16, 2001 (16 weeks)
July 17, 2001
2nd quarter ended September 8, 2001 (12 weeks)
October 9, 2001
3rd quarter ended December 1, 2001 (12 weeks)
January 4, 2002
4th quarter ended February 23, 2002 (12 weeks)
April 4, 2002