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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended September 6, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
--------------------------------------------------
(Exact name of registrant as specified in charter)
Maryland 13-1890974
- --------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive
Montvale, New Jersey 07645
----------------------------------------
(Address of principal executive offices)
(201) 573-9700
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of September 8, 2003 the Registrant had a total of 38,517,218 shares of
common stock - $1 par value outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
12 Weeks Ended 28 Weeks Ended
-------------------------------------- -------------------------------------
Sept. 6, 2003 Sept. 7, 2002 Sept. 6, 2003 Sept. 7, 2002
------------------ ------------------ ------------------ -----------------
Sales $ 2,443,700 $ 2,327,182 $ 5,647,530 $ 5,420,958
Cost of merchandise sold (1,784,774) (1,667,850) (4,109,435) (3,879,811)
------------ -------------- -------------- -------------
Gross margin 658,926 659,332 1,538,095 1,541,147
Store operating, general and
administrative expense (679,839) (666,939) (1,571,467) (1,523,540)
------------ -------------- --------------- -------------
(Loss) income from operations (20,913) (7,607) (33,372) 17,607
Interest expense (17,945) (19,640) (42,829) (46,392)
Interest income 1,773 3,105 3,912 5,064
------------ -------------- -------------- -------------
Loss from continuing operations before
income taxes (37,085) (24,142) (72,289) (23,721)
Provision for income taxes (20,010) (123,119) (5,148) (122,751)
------------ --------------- --------------- -------------
Loss from continuing operations (57,095) (147,261) (77,437) (146,472)
Discontinued operations (Note 2):
(Loss) income from operations of
discontinued businesses, net of tax (21,750) 2,577 (33,209) 3,663
(Loss) gain on disposal of discontinued
operations, net of tax (4,845) - 47,236 -
-------------- -------------- -------------- -------------
(Loss) income from discontinued operations (26,595) 2,577 14,027 3,663
------------- -------------- -------------- -------------
Net loss $ (83,690) $ (144,684) $ (63,410) $ (142,809)
============ ============== ============== =============
Net (loss) income per share - basic and diluted:
Continuing operations $ (1.48) $ (3.82) $ (2.01) $ (3.81)
Discontinued operations (0.69) 0.06 0.36 0.10
------------- --------------- ------------- -------------
Net loss per share - basic and diluted $ (2.17) $ (3.76) $ (1.65) $ (3.71)
============ ============== ============== =============
Weighted average number of
common shares outstanding 38,516,670 38,512,439 38,516,176 38,476,818
Common stock equivalents 635,554 422,850 392,570 776,986
------------- -------------- -------------- -------------
Weighted average number of common and
common equivalent shares outstanding 39,152,224 38,935,289 38,908,746 39,253,804
============= ============== ============== =============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc
Statements of Consolidated Stockholders' Equity and Comprehensive Income
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Accumulated
Common Stock Additional Other Total
----------------------------- Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit (Loss)/Income Equity
-------------- ------------- ------------- ------------- ----------------- ---------------
28 Week Period Ended
September 6, 2003
- --------------------
Balance at beginning of period 38,515,806 $ 38,516 $ 459,411 $ 61,387 $ (61,123) $ 498,191
Net loss (63,410) (63,410)
Other comprehensive income 27,692 27,692
Stock options exercised 1,412 1 11 12
------------ ----------- ----------- ----------- ----------- -----------
Balance at end of period 38,517,218 $ 38,517 $ 459,422 $ (2,023) $ (33,431) $ 462,485
============ =========== =========== ============ =========== ===========
Accumulated
Common Stock Additional Other Total
----------------------------- Paid-in Retained Comprehensive Stockholders'
Shares Amount Capital Earnings (Loss)/Income Equity
-------------- ------------- ------------- ------------- ----------------- ---------------
28 Week Period Ended
September 7, 2002
- --------------------
Balance at beginning of period 38,367,628 $ 38,368 $ 456,753 $ 254,896 $ (77,029) $ 672,988
Net loss (142,809) (142,809)
Other comprehensive income 4,138 4,138
Stock options exercised 148,178 148 2,658 2,806
------------ ----------- ----------- ----------- ----------- -----------
Balance at end of period 38,515,806 $ 38,516 $ 459,411 $ 112,087 $ (72,891) $ 537,123
============ =========== =========== =========== =========== ===========
Comprehensive Income
- --------------------
12 Weeks Ended 28 Weeks Ended
-------------------------------------- -------------------------------------
Sept. 6, 2003 Sept. 7, 2002 Sept. 6, 2003 Sept. 7, 2002
------------------ ------------------ ------------------ -----------------
Net loss $ (83,690) $ (144,684) $ (63,410) $ (142,809)
----------- ----------- ----------- -----------
Foreign currency translation adjustment (9,722) (2,475) 30,359 5,223
Reclassification adjustment for gains
included in net loss, net of tax - - - (933)
Net unrealized loss on derivatives, net of tax (1,960) (152) (2,667) (152)
------------ ------------ ------------ -----------
Other comprehensive (loss) income (11,682) (2,627) 27,692 4,138
----------- ----------- ----------- -----------
Total comprehensive loss $ (95,372) $ (147,311) $ (35,718) $ (138,671)
=========== =========== =========== ===========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
September 6, February 22,
2003 2003
-------------------- --------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 182,607 $ 199,014
Accounts receivable, net of allowance for doubtful accounts
of $12,489 and $9,799 at September 6, 2003 and
February 22, 2003, respectively 198,018 185,411
Inventories 678,704 682,734
Prepaid expenses and other current assets 43,860 32,429
------------- --------------
Total current assets 1,103,189 1,099,588
------------- --------------
Non-current assets:
Property:
Property owned 1,461,347 1,538,117
Property leased under capital leases 70,067 71,806
------------- --------------
Property - net 1,531,414 1,609,923
Other assets 170,271 175,726
------------- --------------
Total assets $ 2,804,874 $ 2,885,237
============= ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 24,638 $ 25,820
Current portion of obligations under capital leases 15,190 13,787
Accounts payable 547,966 511,634
Book overdrafts 118,026 101,817
Accrued salaries, wages and benefits 186,007 180,812
Accrued taxes 78,803 53,774
Other accruals 215,540 202,968
------------- --------------
Total current liabilities 1,186,170 1,090,612
------------- --------------
Non-current liabilities:
Long-term debt 683,051 803,277
Long-term obligations under capital leases 80,286 83,485
Other non-current liabilities 392,882 409,672
------------- --------------
Total liabilities 2,342,389 2,387,046
------------- --------------
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 - 38,517,218 and 38,515,806
shares at September 6, 2003 and February 22, 2003, respectively 38,517 38,516
Additional paid-in capital 459,422 459,411
Accumulated other comprehensive loss (33,431) (61,123)
(Accumulated deficit) retained earnings (2,023) 61,387
-------------- --------------
Total stockholders' equity 462,485 498,191
------------- --------------
Total liabilities and stockholders' equity $ 2,804,874 $ 2,885,237
============= ==============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Cash Flows
(Dollars in thousands)
(Unaudited)
28 Weeks Ended
------------------------------------------
Sept. 6, 2003 Sept. 7, 2002
-------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (63,410) $ (142,809)
Income from discontinued operations (14,027) (3,663)
------------ ------------
Loss from continuing operations (77,437) (146,472)
------------ ------------
Adjustments to reconcile net loss from continuing operations
to net cash provided by operating activities:
Restructuring charge (5,230) 8,266
Depreciation and amortization 147,243 138,750
Realized gain on sale of securities - (1,717)
Deferred income tax (benefit) provision (5,496) 146,709
Loss (gain) on disposal of owned property 100 (3,809)
Other changes in assets and liabilities:
(Increase) decrease in receivables (7,989) 26,138
Decrease in inventories 7,651 7,720
(Increase) decrease in prepaid expenses and other current assets (28,839) 22,408
Decrease in other assets 7,721 7,073
Increase (decrease) in accounts payable 17,440 (32,741)
Increase (decrease) in accrued salaries, wages and benefits 25,412 (22,798)
Decrease in other accruals (5,595) (15,488)
Decrease in other non-current liabilities (47,921) (54,865)
Other operating activities, net (4,280) 356
------------ -----------
Net cash provided by operating activities 22,780 79,530
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (75,864) (134,019)
Proceeds from disposal of property 142,064 42,933
----------- -----------
Net cash provided by (used in) investing activities 66,200 (91,086)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt - 30,000
Proceeds under revolving lines of credit - 28,253
Payments on revolving lines of credit (135,000) (28,253)
Proceeds from long-term borrowings 16,016 77
Payments on long-term borrowings (1,127) (37,576)
Principal payments on capital leases (7,203) (7,239)
Increase in book overdrafts 15,413 3,038
Deferred financing fees (414) (2,522)
Proceeds from exercises of stock options 12 2,806
----------- -----------
Net cash used in financing activities (112,303) (11,416)
Effect of exchange rate changes on cash and cash equivalents 6,916 463
----------- -----------
Net decrease in cash and cash equivalents (16,407) (22,509)
Cash and cash equivalents at beginning of period 199,014 168,620
----------- -----------
Cash and cash equivalents at end of period $ 182,607 $ 146,111
=========== ===========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements of The Great Atlantic &
Pacific Tea Company, Inc. ("We," "Our," "Us" or "Our Company") for the 12 and 28
weeks ended September 6, 2003 and September 7, 2002 are unaudited and, in the
opinion of management, contain all adjustments that are of a normal and
recurring nature necessary to present fairly the financial position and results
of operations for such periods. The consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes
contained in our Fiscal 2002 Annual Report on Form 10-K. Interim results are not
necessarily indicative of results for a full year.
The consolidated financial statements include the accounts of our Company and
all majority-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made to
prior year amounts to conform to current year presentation.
2. Discontinued Operations
In February 2003, we announced the sale of a portion of our non-core assets,
including nine of our stores in northern New England and seven stores in
Madison, Wisconsin. In March 2003, we entered into an agreement to sell an
additional eight stores in northern New England.
Upon the decision to sell these stores, we applied the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144") to these properties
held for sale. SFAS 144 requires properties held for sale to be classified as a
current asset and valued on an asset-by-asset basis at the lower of carrying
amount or fair value less costs to sell. In applying those provisions, we
considered the binding sale agreements related to these properties as an
estimate of the assets' fair value. As a result of the adoption of SFAS 144,
$22.1 million in net property, plant and equipment was reclassified as held for
sale as of February 22, 2003, and included in "Prepaid expenses and other
current assets" on our Consolidated Balance Sheets.
As of April 2003, all of the asset sales described above were completed,
generating proceeds of $137.6 million and resulting in a gain of $81.4 million
($47.2 million after tax). This gain was included in "(Loss) gain on disposal
of discontinued operations, net of tax" on our Consolidated Statements of
Operations for the 28 weeks ended September 6, 2003.
Also, during the first quarter of fiscal 2003, we adopted a formal plan to exit
the Milwaukee, Wisconsin market, where our remaining 23 Kohl's stores are
located, as well as our Eight O'Clock Coffee business through the sale and/or
disposal of these assets.
Upon the decision to exit the remaining Kohl's stores and coffee business, we
estimated the assets' fair market value using a probability weighted average
approach based upon expected proceeds and recorded impairment losses on the
property, plant and equipment of $15.2 million, which is included in "(Loss)
income from operations of discontinued businesses, net of tax" on our
Consolidated Statements of Operations for the first quarter of fiscal 2003. As a
result, $16.4 million in net property, plant and equipment relating to our
remaining properties held for sale, primarily our Kohl's stores and coffee
business, were reclassified at June 14, 2003, and included in "Prepaid expenses
and other current assets" on our Consolidated Balance Sheets. These assets will
no longer be depreciated.
During the 12 weeks ended September 6, 2003, we closed the remaining Kohl's
stores that had not been sold and recorded exit costs of $25.1 million relating
to future rent vacancy, $7.2 million in severance charges and $0.7 million in
inventory markdowns.
As a result, at September 6, 2003, $11.7 million of the northern New England and
Kohl's exit costs were included in "Other accruals" and $20.7 million in "Other
non-current liabilities" on our Consolidated Balance Sheets. In addition, based
upon further information relating to the disposal of these properties held for
sale, we recorded additional impairment losses of $3.7 million during the second
quarter of fiscal 2003 to reduce the carrying value of certain of these assets.
We participate 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 our
other pension plans. The decision to close our Kohl's stores and terminate our
participation in these plans triggered our Company's liability for our unfunded
vested benefits or other expenses under these jointly administered
union/management plans. As a result, we recorded expense for these plans of
approximately $2.5 million and $5.5 million for the 12 and 28 weeks ended
September 6, 2003. In addition, we recorded $1.0 million in expense relating to
withdrawal from Kohl's health and welfare plan during the 28 weeks ended
September 6, 2003. Such amounts as well as the impairment losses and exit costs
described above are included in "(Loss) income from operations of discontinued
businesses, net of tax" in our Consolidated Statements of Operations.
We have accounted for all of these separate business components as discontinued
operations in accordance with SFAS 144. Amounts in the financial statements and
related notes for all periods shown have been reclassified to reflect the
discontinued operations. Summarized below are the operating results for the
discontinued New England and Kohl's supermarkets and Eight O'Clock Coffee
business, which are included in our Consolidated Statements of Operations,
under the caption "(Loss) income from operations of discontinued businesses,
net of tax".
12 Weeks Ended 28 Weeks Ended
-------------------------------------- -------------------------------------
Sept. 6, 2003 Sept. 7, 2002 Sept. 6, 2003 Sept. 7, 2002
------------------ ------------------ ------------------ -----------------
Sales $ 57,395 $ 173,296 $ 200,028 $ 386,758
Operating expenses (96,732) (168,853) (257,284) (380,443)
--------- ----------- ----------- -----------
(Loss) income from operations (39,337) 4,443 (57,256) 6,315
Benefit from (provision for) income taxes 17,587 (1,866) 24,047 (2,652)
--------- ----------- ----------- -----------
(Loss) income from operations of
discontinued businesses $ (21,750) $ 2,577 $ (33,209) $ 3,663
=========== =========== =========== ===========
Depreciation and amortization $ - $ 3,104 $ 1,551 $ 7,459
=========== =========== ============ ============
3. Long Lived Assets
We review the carrying values of our long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. Such review is based upon groups of assets and
the undiscounted estimated future cash flows from such assets to determine if
the carrying value of such assets are recoverable from their respective cash
flows. If such review indicates an impairment exists, we measure such impairment
on a discounted basis.
We also review individual assets for impairment upon determination that such
assets will not be used for their intended useful life. During the 12 and 28
weeks ended September 6, 2003, we recorded impairment losses on property, plant
and equipment of $4.2 million and $19.4 million, respectively, compared to $4.3
million and $10.2 million recorded during the 12 and 28 weeks ended September 7,
2002, respectively. Of these amounts, $0.5 million in both fiscal 2003 periods
presented and all of the fiscal 2002 amounts related to U.S. Retail stores that
were or will be closed in the normal course of business and are included in
"Store operating, general and administrative expense" in our Consolidated
Statements of Operations. The remaining impairment losses we recorded of $3.7
million and $18.9 million during the 12 and 28 weeks ended September 6, 2003,
respectively, related to stores closed as a result of our exit of the Kohl's
business and are included in our Consolidated Statements of Operations under the
caption "(Loss) income from operations of discontinued businesses, net of tax"
(see Note 2 of our Consolidated Financial Statements). Based upon current
trends, there may be additional future impairments on long lived assets,
including the potential for impairment of assets that are held and used. In
certain cases, such impairment testing could also trigger a test for the
recoverability of goodwill under SFAS 142 "Goodwill and Other Intangible
Assets."
4. Income Taxes
The income tax provision recorded for the 28 weeks ended September 6, 2003 and
September 7, 2002 reflects our estimated expected annual tax rates applied to
our respective domestic and foreign financial results.
SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109") requires that a
valuation allowance be created and offset against a net deferred tax asset if,
based on existing facts and circumstances, it is more likely than not that some
portion or all of the deferred tax asset will not be realized. Based upon our
continued assessment of the realization of our U.S. net deferred tax asset and
our historic cumulative losses, and in particular, the significant increase in
U.S. operating losses during the second quarter of fiscal 2002, we concluded
that it was appropriate to establish a full valuation allowance for our U.S. net
deferred tax asset in the amount of approximately $133.7 million during the 28
weeks ended September 7, 2002. During the remainder of fiscal 2002, the
valuation allowance was increased by an additional $32.9 million. For the 12 and
28 weeks ended September 6, 2003, the valuation allowance was increased by $38.8
million and $35.8 million, respectively. To the extent that our U.S. operations
generate taxable income in future periods, we will reverse the income tax
valuation allowance. In future periods, U.S. earnings or losses will not be tax
effected until such time as the certainty of future tax benefits can be
reasonably assured.
We had a net current deferred tax asset which is included in "Prepaid expenses
and other current assets" on our Consolidated Balance Sheets totaling $0.9
million and a net non-current deferred tax liability which is included in "Other
non-current liabilities" on our Consolidated Balance Sheets totaling $10.4
million at September 6, 2003 relating to our Canadian operations.
5. Wholesale Franchise Business
As of September 6, 2003, the Company served 64 franchised stores. These
franchisees are required to purchase inventory exclusively from our Company,
which acts as a wholesaler to the franchisees. We had sales to these franchised
stores of $178 million and $160 million for the second quarters of fiscal 2003
and 2002, respectively, and $428 million and $381 million for the first 28 weeks
of fiscal 2003 and 2002, respectively. In addition, we sublease the stores and
lease the equipment in the stores to the franchisees. We also provide
merchandising, advertising, accounting and other consultative services to the
franchisees for which we receive a fee, which primarily represents the
reimbursement of costs incurred to provide such services.
We hold 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 an
allowance for doubtful accounts, amounting to approximately $0.5 million and
$3.6 million, are included in "Accounts receivable" on our Consolidated Balance
Sheets at September 6, 2003 and February 22, 2003, respectively. The long-term
portion of the inventory notes and equipment leases amounting to approximately
$42.3 million and $41.1 million are included in "Other assets" on our
Consolidated Balance Sheets at September 6, 2003 and February 22, 2003,
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, we establish an allowance for doubtful accounts. We
continually assess 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, we
reserve the option to reacquire the inventory and equipment at the store and
operate the franchise as a corporate owned store.
Refer to Note 6 - Impact of New Accounting Pronouncements regarding our
Company's analysis of our franchisees to determine if they are variable interest
entities in accordance with FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 ("FIN 46").
Refer to Note 11 - Commitments and Contingencies regarding our pending class
action lawsuit relating to our Canadian franchise business.
6. Impact of New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
145, "Rescission of FASB Statements 4, 44 and 64, Amendment of FASB Statement
13, and Technical Corrections". SFAS 145 rescinds the provisions of SFAS 4 that
requires companies to classify certain gains and losses from debt
extinguishments as extraordinary items, eliminates the provisions of SFAS 44
regarding transition to the Motor Carrier Act of 1980 and amends the provisions
of SFAS 13 to require that certain lease modifications be treated as sale
leaseback transactions. The provisions of SFAS 145 related to classification of
debt extinguishment are effective for fiscal years beginning after May 15, 2002.
In current and future periods, we have and will classify debt extinguishment
costs within income from operations and reclassify previously reported debt
extinguishments as such. The provisions of SFAS 145 related to lease
modifications are effective for transactions occurring after May 15, 2002. The
provisions of SFAS 145 related to lease modifications did not have a material
impact on our financial position or results of operations.
In January 2003, the FASB issued FIN 46. FIN 46 addresses the consolidation of
entities whose equity holders have either (a) not provided sufficient equity at
risk to allow the entity to finance its own activities or (b) do not possess
certain characteristics of a controlling financial interest. FIN 46 requires the
consolidation of these entities, known as variable interest entities ("VIE's"),
by the primary beneficiary of the entity. The primary beneficiary is the entity,
if any, that is subject to a majority of the risk of loss from the VIE's
activities, entitled to receive a majority of the VIE's residual returns, or
both. FIN 46 applies immediately to variable interests in VIE's created or
obtained after January 31, 2003. For variable interests in a VIE created before
February 1, 2003, FIN 46 is applied to the VIE's no later than the end of the
first reporting period ending after December 15, 2003 (the quarter and year
ending February 28, 2004 for our Company). The Interpretation requires certain
disclosures in financial statements issued after January 31, 2003, if it is
reasonably possible that our Company will consolidate or disclose information
about variable interest entities when the Interpretation becomes effective.
As discussed further in Note 5, our Company served 64 franchised stores as of
September 6, 2003. These franchisees are required to purchase inventory
exclusively from our Company, which acts as a wholesaler to the franchisees. Our
exposure to loss as a result of our involvement with these franchisees includes
our operating income generated from our wholesale segment as detailed in
Footnote 9 "Operating Segments" and our equipment leases and inventory notes,
which totaled $42.8 million at September 6, 2003. We are currently in the
process of analyzing the franchisees in accordance with FIN 46 to determine if
any or all are VIE's. If we determine that these franchisees are VIE's, it is
reasonably possible we are the primary beneficiary of these VIE's and thus would
be required to consolidate these VIE's, as it is currently structured, upon FIN
46 becoming effective for our Company.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new guidance amends SFAS 133 for decisions made: (a) as part of the
Derivatives Implementation Group process that effectively required amendments to
SFAS 133, (b) in connection with other Board projects dealing with financial
instruments, and (c) regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of an "underlying" and the characteristics of a derivative that contains
financing components. The amendments set forth in SFAS 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003 (with a few exceptions) and for hedging
relationships designated after June 30, 2003. The guidance is to be applied
prospectively. The provisions of SFAS 149 did not have a material impact on our
financial position or results of operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for classification and measurement in the balance
sheets for certain financial instruments which possess characteristics of both a
liability and equity. Generally, it requires classification of such financial
instruments as a liability. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003. For financial instruments in
existence prior to May 31, 2003, SFAS 150 is effective for fiscal periods
beginning after June 15, 2003 (i.e., our third quarter of fiscal 2003). We
believe that the adoption of SFAS 150 will not have a material impact on our
financial statements.
7. Asset Disposition Initiative
In fiscal 1998 and 1999, we announced a plan to close two warehouse facilities
and a coffee plant in the U.S., a bakery plant in Canada and 166 stores
including the exit of the Richmond, Virginia and Atlanta, Georgia markets. In
addition, during the third quarter of fiscal 2001, we announced that certain
underperforming operations, including 39 stores (30 in the United States and 9
in Canada) and 3 warehouses would be closed and/or sold, and certain
administrative streamlining would take place.
As of September 6, 2003, we closed all of the above stores and facilities. The
following table summarizes the activity related to the charges recorded for the
aforementioned initiatives since the beginning of fiscal 2002:
Severance
and Goodwill/
Occupancy Benefits Fixed Assets Total
------------ ------------- -------------- ------------
Balance at
February 23, 2002 $ 143,700 $ 22,137 $ - $ 165,837
Addition (1) 7,249 3,544 - 10,793
Utilization (2) (34,003) (19,830) 776 (53,057)
Adjustments (3) (13,825) 889 (776) (13,712)
------------ ------------- -------------- ------------
Balance at
February 22, 2003 $ 103,121 $ 6,740 $ - $ 109,861
Addition (1) 3,120 - - 3,120
Utilization (2) (13,960) (2,691) - (16,651)
Adjustments (3) (6,778) 958 - (5,820)
------------ ------------- -------------- ------------
Balance at
September 6, 2003 $ 85,503 $ 5,007 $ - $ 90,510
============ ============= ============== ============
(1) The additions to occupancy represent the present value of accrued
interest related to lease obligations. The addition to severance during
fiscal 2002 related to retention and productivity incentives that were
accrued as earned.
(2) Occupancy utilization represents vacancy related payments for closed
locations. Severance utilization represents payments made to terminated
employees during the period.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2003, we recorded net
adjustments of $5.8 million primarily related to reversals of
previously accrued vacancy related costs due to favorable results of
terminating and subleasing certain locations. During fiscal 2002, we
recorded net adjustments of $13.7 million primarily related to
reversals of previously accrued vacancy related costs due to the
following:
o Favorable results of assigning leases at certain locations of $7.2
million;
o The decision to continue to operate one of the stores previously
identified for closure due to changes in the competitive
environment in the market in which that store is located of $3.3
million; and
o The decision to proceed with development at a site that we had
chosen to abandon at the time of the original charge due to
changes in the competitive environment in the market in which that
site is located of $3.3 million.
As of September 6, 2003, we paid approximately $54 million of the total original
severance and benefits charge recorded, which resulted from the termination of
approximately 4,500 employees. The remaining severance liability primarily
relates to future obligations for early withdrawal from multi-employer union
pension plans and individual severance payments which will be paid by the end of
fiscal 2003.
At September 6, 2003, approximately $16.0 million of the liability was included
in "Other accruals" and the remaining amount was included in "Other non-current
liabilities" on our Consolidated Balance Sheets.
Included in our Consolidated Statements of Operations for the 12 and 28 weeks
ended September 6, 2003 and September 7, 2002 are the sales and operating
results of the aforementioned stores while they were open during the periods
presented. The results of these operations are as follows:
12 Weeks Ended 28 Weeks Ended
------------------------------- -------------------------------
Sept. 6, Sept. 7, Sept. 6, Sept. 7,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Sales $ - $ 7,434 $ 316 $ 26,546
============= ============ ============= =============
Operating loss $ - $ (932) $ (72) $ (2,220)
============= ============ ============= =============
Based upon current available information, we evaluated the liability balance as
of September 6, 2003 of $91 million and have concluded that it is adequate. We
will continue to monitor the status of the vacant properties and adjustments to
the reserve balance may be recorded in the future, if necessary.
8. Stock Based Compensation
We apply 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 compensation expense, net income or loss and
earnings per share as if the fair value based method prescribed by SFAS 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and SFAS 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148") had been
applied.
Had compensation cost for our 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 and SFAS 148, our net loss and net loss per
share would have been reduced to the pro forma amounts indicated below:
12 Weeks Ended 28 Weeks Ended
----------------------------------- -----------------------------------
Sept. 6, Sept. 7, Sept. 6, Sept. 7,
2003 2002 2003 2002
--------------- ---------------- --------------- ---------------
Net loss, as reported: $ (83,690) $ (144,684) $ (63,410) $ (142,809)
Deduct/(Add): Stock-based employee
compensation income included
in reported net income, net of
related tax effects - - - 449
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects (1,422) (1,996) (3,543) (3,978)
-------------- --------------- -------------- --------------
Pro forma net loss $ (85,112) $ (146,680) $ (66,953) $ (147,236)
============== =============== ============== ==============
Net loss per share - basic and diluted:
As reported $ (2.17) $ (3.76) $ (1.65) $ (3.71)
Pro forma $ (2.21) $ (3.81) $ (1.74) $ (3.82)
The pro forma effect on net loss and net loss 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.
The fair value of the option grants was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
12 Weeks Ended 28 Weeks Ended
----------------------------------- -----------------------------------
Sept. 6, Sept. 7, Sept. 6, Sept. 7,
2003 2002 2003 2002
--------------- ---------------- --------------- ---------------
Expected life 7 years 7 years 7 years 7 years
Volatility 49% 47% 49% 47%
Risk-free interest rate range 2.71%-4.01% 3.85%-4.57% 2.71%-4.01% 3.85%-5.18%
9. Operating Segments
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. Our chief operating decision maker is our Chairman of the
Board, President and Chief Executive Officer.
We currently operate 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 our Canadian operation that serves as the exclusive wholesaler to
our 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 included in our Fiscal 2002 Annual
Report. We measure segment performance based upon income (loss) from operations.
Interim information on segments is as follows:
12 Weeks Ended 28 Weeks Ended
---------------------------------------- ---------------------------------------
(Dollars in thousands) September 6, September 7, September 6, September 7,
2003 2002 2003 2002
------------------ ------------------ ----------------- -----------------
Sales
U.S. Retail $ 1,735,013 $ 1,715,173 $ 3,993,343 $ 4,014,889
Canada Retail 531,045 451,934 1,226,033 1,024,818
Canada Wholesale 177,642 160,075 428,154 381,251
------------------ ------------------ ----------------- -----------------
Total Company $ 2,443,700 $ 2,327,182 $ 5,647,530 $ 5,420,958
================== ================== ================= =================
Depreciation and amortization
U.S. Retail $ 50,002 $ 49,281 $ 119,403 $ 109,956
Canada Retail 11,594 9,459 26,289 21,335
Canada Wholesale - - - -
------------------ ------------------ ----------------- -----------------
Total Company $ 61,596 $ 58,740 $ 145,692 $ 131,291
================== ================== ================= =================
(Loss) income from operations
U.S. Retail $ (37,250) $ (31,123) $ (69,607) $ (27,265)
Canada Retail 10,759 16,756 21,438 28,256
Canada Wholesale 5,578 6,760 14,797 16,616
------------------ ------------------ ----------------- -----------------
Total Company $ (20,913) $ (7,607) $ (33,372) $ 17,607
================== =================== ================== =================
(Loss) income from continuing
operations before income taxes
U.S. Retail $ (53,017) $ (46,835) $ (107,538) $ (66,570)
Canada Retail 10,249 15,737 20,133 25,746
Canada Wholesale 5,683 6,956 15,116 17,103
------------------ ------------------ ----------------- -----------------
Total Company $ (37,085) $ (24,142) $ (72,289) $ (23,721)
================== ================== ================= =================
Capital expenditures
U.S. Retail $ 7,249 $ 38,895 $ 46,314 $ 108,249
Canada Retail 11,666 6,633 29,550 25,770
Canada Wholesale - - - -
------------------ ------------------ ----------------- -----------------
Total Company $ 18,915 $ 45,528 $ 75,864 $ 134,019
================== ================== ================= =================
September 6, February 22,
2003 2003
----------------- -----------------
Total assets
U.S. Retail $ 2,041,050 $ 2,216,455
Canada Retail 683,356 597,634
Canada Wholesale 80,468 71,148
----------------- -----------------
Total Company $ 2,804,874 $ 2,885,237
================= =================
10. North American Power Outage
In August 2003, a major power outage affected our Northeast, Michigan and
Canadian operations. We maintain insurance coverage which provides for
reimbursement for product loss as well as incremental costs incurred as a result
of this blackout. Therefore, our second quarter results were not materially
affected by the power outage.
11. Commitments and Contingencies
In May of 1999, four present and former employees of The Food Emporium filed
suit against our Company in federal court in New York for unpaid wages and
overtime. In April 2000, the judge certified the case as a class action status
for this case covering approximately 82 stores in 9 counties in the New York
metropolitan area. Approximately 840 current and former full and part-time
employees of The Food Emporium and A&P opted into the class. In April 2003, the
Company filed a Motion to Decertify the Collective Action under the Fair Labor
Standards Act.
In April 2002, three Canadian Food Basics franchisees commenced a breach of
contract action in a Canadian court against The Great Atlantic & Pacific Company
of Canada, Limited ("A&P Canada") as representative plaintiffs for a purported
class of approximately 70 current and former Canadian Food Basics franchisees.
The lawsuit seeks unspecified damages in connection with A&P Canada's alleged
failure to distribute to the franchisees the full amount of vendor allowances
and/or rebates to which the franchisees claim they are entitled under the
operative franchise agreements. A&P Canada disputes the plaintiff-franchisees'
claim and has filed a counterclaim seeking to recover subsidies made by it to
the plaintiffs. The lawsuit was certified as a class action in December 2002.
The majority of the potential class members have opted out of this class
proceeding. A&P Canada has obtained leave to appeal the class certification
order. The appeal hearing took place on June 26, 2003 and June 27, 2003. The
appeal court has not yet rendered its decision.
On June 5, 2002, a purported securities class action Complaint was filed in the
United States District Court for the District of New Jersey against our Company
and certain of our officers and directors in an action captioned Brody v. The
Great Atlantic & Pacific Tea Co., Inc., No. 02 CV 2674 (FSH). The Brody lawsuit
and four subsequently-filed related lawsuits were consolidated into a single
lawsuit captioned In re The Great Atlantic & Pacific Tea Company, Inc.
Securities Litigation, No. 02 CV 2674 (FSH) (the "Class Action Lawsuit"). On
December 2, 2002, plaintiffs filed their Consolidated Amended Class Action
Complaint (the "Complaint"), which alleged claims under Sections 10(b) (and Rule
10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934
arising out of our Company's July 5, 2002 filing of restated financial
statements for fiscal 1999, fiscal 2000 and the first three quarters of fiscal
2001. The Complaint in the Class Action Lawsuit sought unspecified money
damages, costs and expenses. On January 17, 2003, defendants filed a motion
seeking to dismiss the Complaint. On February 28, 2003, plaintiffs filed their
brief in opposition to defendants' motion. Defendants' reply brief in support of
their dismissal motion was filed on March 28, 2003. By Opinion & Order entered
on September 18, 2003, the Court dismissed plaintiffs' Complaint without
prejudice. The Court ultimately imposed an October 7, 2003 deadline by which
plaintiffs' Second Amended Complaint had to be filed. On October 1, 2003,
defendants filed a motion requesting that the Court reconsider the portion of
its September 18, 2003 Opinion & Order which granted plaintiffs' leave to
further amend. By letter dated October 8, 2003, plaintiffs advised the Court
that they did not intend to file a Second Amended Complaint and, in fact, no
Second Amended Complaint was filed by that deadline. On October 13, 2003,
plaintiffs filed a Notice of Appeal advising that they are appealing to the
United States Court of Appeals for the Third Circuit from the District Court's
September 18, 2003 Opinion & Order.
We are subject to various other legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. We are also subject
to certain environmental claims. 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 our consolidated
results of operations, financial position or cash flows.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
- ------------
This Management's Discussion and Analysis describes matters considered by
Management to be significant to understanding the financial position, results of
operations and liquidity of our Company, including a discussion of the results
of operations as well as liquidity and capital resources. These items are
presented as follows:
o Basis of Presentation -- a discussion of our Company's fiscal year end and
interim reporting periods.
o Results of Continuing Operations and Liquidity and Capital Resources -- a
discussion of the following:
- Results for the 12 weeks ended September 6, 2003 compared to the 12 weeks
ended September 7, 2002;
- Results for the 28 weeks ended September 6, 2003 compared to the 28 weeks
ended September 7, 2002;
- The Company's Asset Disposition Initiative; and
- Current and expected future liquidity.
o Critical Accounting Estimates -- a discussion of significant estimates made by
Management.
BASIS OF PRESENTATION
- ---------------------
The accompanying consolidated financial statements of The Great Atlantic &
Pacific Tea Company, Inc. ("We," "Our," "Us" or "Our Company") for the 12 and 28
weeks ended September 6, 2003 and September 7, 2002 are unaudited and, in the
opinion of management, contain all adjustments that are of a normal and
recurring nature necessary to present fairly the financial position and results
of operations for such periods. The consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes
contained in our Fiscal 2002 Annual Report on Form 10-K. Interim results are not
necessarily indicative of results for a full year.
The consolidated financial statements include the accounts of our Company and
all majority-owned subsidiaries.
RESULTS OF CONTINUING OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------
Our consolidated financial information presents the income related to our
operations of discontinued businesses separate from the results of our
continuing operations. The discussion and analysis that follows focuses on
continuing operations.
12 WEEKS ENDED SEPTEMBER 6, 2003 COMPARED TO THE 12 WEEKS ENDED
SEPTEMBER 7, 2002
- ---------------------------------------------------------------
OVERALL
- -------
Sales for the second quarter of fiscal 2003 were $2.4 billion, compared with
$2.3 billion in the second quarter of fiscal 2002; comparable store sales, which
includes stores that have been in operation for two full fiscal years and
replacement stores, increased 1.1%. Net loss per share - basic and diluted for
the second quarter of fiscal 2003 was $2.17 compared to $3.76 for the second
quarter of fiscal 2002.
SALES
- -----
Sales for the second quarter of fiscal 2003 of $2,444 million increased
$117 million or 5.0% from sales of $2,327 million for the second quarter of
fiscal 2002. The higher sales were due to an increase in retail sales of $99
million and an increase in wholesale sales of $18 million. The increase in
retail sales was attributable to the opening of 33 new stores since the
beginning of the second quarter of fiscal 2002, of which 11 were opened in
fiscal 2003, increasing sales by $30 million, the favorable effect of the
Canadian exchange rate, which increased sales by $59 million, and the increase
in comparable store sales for the second quarter of fiscal 2003 of 1.1% (up 1.5%
in the U.S. and down 0.4% in Canada) when compared to the second quarter of
fiscal 2002. These increases were partially offset by the closure of 66 stores
since the beginning of the second quarter of fiscal 2002, of which 43 were sold
or closed in fiscal 2003, which decreased sales by $15 million. The increase in
wholesale sales was attributable to the favorable effect of the Canadian
exchange rate of $20 million offset by lower sales volume of $2 million.
Sales in the U.S. for the second quarter of fiscal 2003 increased by $20 million
or 1.2% compared to the second quarter of fiscal 2002. Sales in Canada for the
second quarter of fiscal 2003 increased by $97 million or 15.8% from the second
quarter of fiscal 2002.
Average weekly sales per supermarket were approximately $304,000 for the second
quarter of fiscal 2003 versus $294,200 for the corresponding period of the prior
year, an increase of 3.3%. This increase was primarily due to the increase in
the Canadian exchange rate and higher comparable store sales.
GROSS MARGIN
- ------------
Gross margin as a percentage of sales decreased 137 basis points to 26.96% for
the second quarter of fiscal 2003 from 28.33% for the second quarter of fiscal
2002. The gross margin dollar decrease of $0.4 million resulted from the
decrease in the gross margin rate partially offset by the increases in sales
volume and the favorable Canadian exchange rate. The U.S. operations gross
margin decrease of $13 million resulted from decreases of $19 million due to the
lower gross margin rate partially offset by $6 million due to higher sales
volume. The Canadian operations gross margin increase of $13 million resulted
from increases of $4 million due to higher sales volume and $17 million from
fluctuations in the Canadian exchange rate partially offset by a decrease of $8
million due to a lower gross margin rate. This 137 basis point decrease was
caused primarily by continued competitive pressures to drive sales volume and
protect market share in the current market.
Included in gross margin for the second quarter of fiscal 2002 were costs
related to our asset disposition initiative of $0.2 million, which were incurred
to mark down inventory in stores announced for closure. There were no such costs
recorded in the second quarter of fiscal year 2003.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
Store operating, general and administrative expense ("SG&A") was $680 million
for the second quarter of fiscal 2003 compared to $667 million for the second
quarter of fiscal 2002. As a percentage of sales, SG&A was 27.82% for the second
quarter of fiscal 2003 compared to 28.66% for the second quarter of fiscal 2002.
The major items impacting this decrease in SG&A as a percentage of sales
include:
o Higher mix of sales in Canada which has a lower SG&A rate due to the increase
in the Canadian exchange rate;
o Lower store occupancy expense;
o Lower closed store expenses for stores closed during the normal course of
business; and
o Lower costs related to our business process initiative;
Partially offset by the following:
o Higher severance and employee buy-out costs in the U.S.;
o Increased labor costs as a percentage of sales in the U.S.
Included in SG&A for the second quarter of fiscal 2003 were net gains of $5.2
million primarily relating to favorable lease terminations previously reserved
for as part of our asset disposition initiative. In addition, included in SG&A
for the second quarter of fiscal 2002 were net costs of $1.1 million relating to
our asset disposition initiative as described in Note 2 of our Consolidated
Financial Statements included in our Fiscal 2002 Annual Report to Stockholders.
Also included in SG&A for fiscal 2002 were $15.0 million relating to our
business process initiative. Such costs primarily included professional
consulting fees and salaries, including related benefits, of employees working
full-time on the initiative.
We also review individual assets for impairment upon determination that such
assets will not be used for their intended useful life. During the second
quarter of fiscal 2003 and 2002, we recorded impairment losses on property,
plant and equipment of $0.5 million and $4.3 million, respectively, related to
U.S. Retail stores that were or will be closed in the normal course of business.
This amount is included in "Store operating, general and administrative expense"
in our Consolidated Statements of Operations. Based upon current trends, there
may be additional future impairments on long lived assets, including the
potential for impairment of assets that are held and used. In certain cases,
such impairment testing could also trigger a test for the recoverability of
goodwill under SFAS 142 "Goodwill and Other Intangible Assets."
INTEREST EXPENSE
- ----------------
Interest expense of $18 million for the second quarter of fiscal 2003
decreased from the prior year amount of $20 million due primarily to lower
interest expense resulting from our open market repurchase of $51 million of our
7.75% Senior Notes due April 15, 2007 and $45 million of our 9.125% Senior Notes
due December 15, 2011, during fiscal 2002.
INCOME TAXES
- ------------
The provision for income taxes from continuing operations for the second quarter
of fiscal 2003 was $20 million (a $14 million provision for our U.S.
operations and a $6 million provision for our Canadian operations) compared to
$123 million (a $114 million provision for our U.S. operations and a $9
million provision for our Canadian operations) for the second quarter of fiscal
2002. $13 million of our U.S. tax provision from continuing operations was
offset by a tax benefit provided on discontinued operations in accordance with
Statement of Financial Accounting Standards 109, "Accounting for Income Taxes".
(LOSS) INCOME FROM OPERATIONS OF DISCONTINUED BUSINESSES, NET OF TAX
- --------------------------------------------------------------------
Loss from operations of discontinued businesses, net of tax for the second
quarter of fiscal 2003 was $22 million as compared to income from operations of
$3 million for the second quarter of fiscal 2002. Beginning in the fourth
quarter of fiscal year 2002 and in the early part of the first quarter of fiscal
2003, we decided to sell our operations located in Northern New England, Madison
and Milwaukee, Wisconsin as well as our Eight O'Clock Coffee business.
During the second quarter of fiscal 2003, we decided to close the remaining
Kohl's stores that had not been sold and recorded exit costs of $25.1 million
relating to future rent vacancy, $7.2 million in severance charges and $0.7
million in inventory markdowns. In addition, based upon further information
relating to the disposal of these properties held for sale, we recorded
additional impairment losses of $3.7 million during the second quarter of fiscal
2003 to reduce the carrying value of these assets and $2.5 million in pension
expense relating to early withdrawal from various multi-employer union pension
plans we participate in. The remaining amounts for each period represent the
operating results of the stores in these locations as well as our Eight O'Clock
Coffee business.
28 WEEKS ENDED SEPTEMBER 6, 2003 COMPARED TO THE 28 WEEKS ENDED
SEPTEMBER 7, 2002
- -------------------------------------------------------------------------------
OVERALL
- -------
Sales for the 28 weeks ended September 6, 2003 were $5.6 billion, compared with
$5.4 billion in the 28 weeks ended September 7, 2002; comparable store sales,
which includes stores that have been in operation for two full fiscal years and
replacement stores, increased 0.4%. Net loss per share - basic and diluted for
the 28 weeks ended September 6, 2003 was $1.65 compared to $3.71 for the 28
weeks ended September 7, 2002.
SALES
- -----
Sales for the 28 weeks ended September 6, 2003 of $5,648 million
increased $227 million or 4.2% from sales of $5,421 million for the 28 weeks
ended September 7, 2002. The higher sales were due to an increase in retail
sales of $180 million and an increase in wholesale sales of $47 million. The
increase in retail sales was attributable to the opening of 42 new stores since
the beginning of fiscal 2002, of which 11 were opened in fiscal 2003, increasing
sales by $96 million, the favorable effect of the Canadian exchange rate, which
increased sales by $121 million, and the increase in comparable store sales for
the 28 weeks ended September 6, 2003 of 0.4% (flat in the U.S. and up 1.9% in
Canada) when compared to the 28 weeks ended September 7, 2002. This increase was
partially offset by the closure of 85 stores since the beginning of fiscal 2002,
of which 43 were sold or closed in fiscal 2003, which decreased sales by $55
million. The increase in wholesale sales was attributable to higher sales volume
of $5 million and the favorable effect of the Canadian exchange rate of $42
million.
Sales in the U.S. for the 28 weeks ended September 6, 2003 decreased by $21
million or 0.5% compared to the 28 weeks ended September 7, 2002. Sales in
Canada for the 28 weeks ended September 6, 2003 increased by $248 million or
17.6% from the 28 weeks ended September 7, 2002.
Average weekly sales per supermarket were approximately $300,800 for the 28
weeks ended September 6, 2003 versus $293,100 for the corresponding period of
the prior year, an increase of 2.6%. This increase was primarily due to the
increase in the Canadian exchange rate and higher comparable store sales.
GROSS MARGIN
- ------------
Gross margin as a percentage of sales decreased 119 basis points to
27.23% for the 28 weeks ended September 6, 2003 from 28.43% for the 28 weeks
ended September 7, 2002. The gross margin dollar decrease of $3 million resulted
from the decrease in the gross margin rate partially offset by the increases in
sales volume and the favorable Canadian exchange rate. The U.S. operations gross
margin decrease of $35 million resulted from decreases of $7 million due to
lower sales volume and $28 million due to a lower gross margin rate. The
Canadian operations gross margin increase of $32 million resulted from increases
of $19 million due to higher sales volume and $34 million from fluctuations in
the Canadian exchange rate partially offset by a decrease of $21 million due to
a lower gross margin rate. This 119 basis point decrease was caused primarily by
continued competitive pressures to drive sales volume and protect market share
in the current market.
Included in gross margin for the 28 weeks ended September 7, 2002 were costs
related to our asset disposition initiative of $1.0 million, which were incurred
to mark down inventory in stores announced for closure. There were no such costs
recorded in the 28 weeks ended September 6, 2003.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
Store operating, general and administrative expense ("SG&A") was $1.6 billion
for the 28 weeks ended September 6, 2003 compared to $1.5 billion for the 28
weeks ended September 7, 2002. As a percentage of sales, SG&A was 27.83% for the
28 weeks ended September 6, 2003 compared to 28.10% for the 28 weeks ended
September 7, 2002.
The major items impacting this decrease in SG&A as a percentage of sales
include:
o Higher mix of sales in Canada which has a lower SG&A rate due to the increase
in the Canadian exchange rate; and
o Lower costs related to our business process initiative;
Partially offset by the following:
o Increased labor costs as a percentage of sales in the U.S.;
o Higher severance and employee buy-out costs in the U.S.;
o Increased advertising costs for store promotional expense; and
o Higher store occupancy expense
Included in SG&A for the 28 weeks ended September 6, 2003 were net gains of $5.2
million primarily relating to favorable lease terminations previously reserved
for as part of our asset disposition initiative. In addition, included in SG&A
for the 28 weeks ended September 7, 2002 were net costs of $7.2 million relating
to our asset disposition initiative as described in Note 2 of our Consolidated
Financial Statements included in our Fiscal 2002 Annual Report to Stockholders,
a loss of $0.7 million relating to the early extinguishment of $38 million of
our 7.75% Notes due April 15, 2007 as described in Note 6 of our Consolidated
Financial Statements included in our Fiscal 2002 Annual Report to Stockholders
and a gain of $1.7 million related to the sale of securities received as part of
the demutualization of The Prudential Insurance Company as described in Note 15
of our Consolidated Financial Statements included in our Fiscal 2002 Annual
Report to Stockholders.
Also included in SG&A for the 28 weeks ended September 7, 2002 were $35.1
million relating to our business process initiative. Such costs primarily
included professional consulting fees and salaries, including related benefits,
of employees working full-time on the initiative.
We also review individual assets for impairment upon determination that such
assets will not be used for their intended useful life. During the 28 weeks
ended September 6, 2003 and September 7, 2002, we recorded impairment losses on
property, plant and equipment of $0.5 million and $10.2 million, respectively,
related to U.S. Retail stores that were or will be closed in the normal course
of business. This amount is included in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations. Based upon
current trends, there may be additional future impairments on long lived assets,
including the potential for impairment of assets that are held and used. In
certain cases, such impairment testing could also trigger a test for the
recoverability of goodwill under SFAS 142 "Goodwill and Other Intangible
Assets."
INTEREST EXPENSE
- ----------------
Interest expense of $43 million for the 28 weeks ended September 6, 2003
decreased from the prior year amount of $46 million due primarily to lower
interest expense resulting from our open market repurchase of $51 million of our
7.75% Senior Notes due April 15, 2007 and $45 million of our 9.125% Senior Notes
due December 15, 2011, during fiscal 2002.
INCOME TAXES
- ------------
The provision for income taxes from continuing operations for the 28 weeks ended
September 6, 2003 was $5 million (an $8 million benefit for our U.S. operations
and a $13 million provision for our Canadian operations) compared to $123
million (a $106 million provision for our U.S. operations and a $17 million
provision for our Canadian operations) for the 28 weeks ended September 7, 2002.
Our U.S. tax benefit from continuing operations was offset by a tax provision
provided on discontinued operations in accordance with Statement of Financial
Accounting Standards 109, "Accounting for Income Taxes".
(LOSS) INCOME FROM OPERATIONS OF DISCONTINUED BUSINESSES, NET OF TAX
- --------------------------------------------------------------------
Loss from operations of discontinued businesses, net of tax for the 28 weeks
ended September 6, 2003 was $33 million as compared to income from operations of
$4 million for the 28 weeks ended September 7, 2002. Beginning in the fourth
quarter of fiscal year 2002 and in the early part of the first quarter of fiscal
2003, we decided to sell our operations located in Northern New England, Madison
and Milwaukee, Wisconsin as well as our Eight O'Clock Coffee business.
During the 28 weeks ended September 6, 2003, we recorded the following costs
related to these discontinued businesses:
o impairment losses on the property, plant and equipment relating to these
operations of $18.9 million;
o pension expense relating to early withdrawal from various multi-employer
union pension plans we participate in of $5.5 million;
o future rent vacancy charges of $25.1 million;
o severance charges of $7.2 million; and
o inventory markdowns of $0.7 million.
The remaining amounts for each period represent the operating results of the
stores in these locations as well as our Eight O'Clock Coffee business.
ASSET DISPOSITION INITIATIVE
- ----------------------------
In fiscal 1998 and 1999, we announced a plan to close two warehouse facilities
and a coffee plant in the U.S., a bakery plant in Canada and 166 stores
including the exit of the Richmond, Virginia and Atlanta, Georgia markets. In
addition, during the third quarter of fiscal 2001, we announced that certain
underperforming operations, including 39 stores (30 in the United States and 9
in Canada) and 3 warehouses would be closed and/or sold, and certain
administrative streamlining would take place.
As of September 6, 2003, we closed all of the above stores and facilities. The
following table summarizes the activity related to the charges recorded for the
aforementioned initiatives since the beginning of fiscal 2002:
Severance
and Goodwill/
Occupancy Benefits Fixed Assets Total
------------- ------------- -------------- -------------
Balance at
February 23, 2002 $ 143,700 $ 22,137 $ - $ 165,837
Addition (1) 7,249 3,544 - 10,793
Utilization (2) (34,003) (19,830) 776 (53,057)
Adjustment (3) (13,825) 889 (776) (13,712)
------------- ------------- --------------- ------------
Balance at
February 22, 2003 $ 103,121 $ 6,740 $ - $ 109,861
Addition (1) 3,120 - - 3,120
Utilization (2) (13,960) (2,691) - (16,651)
Adjustments (3) (6,778) 958 - (5,820)
------------ ------------- -------------- ------------
Balance at
September 6, 2003 $ 85,503 $ 5,007 $ - $ 90,510
============ ============= ============== ============
(1) The additions to occupancy represent the present value of accrued
interest related to lease obligations. The addition to severance during
fiscal 2002 related to retention and productivity incentives that were
accrued as earned.
(2) Occupancy utilization represents vacancy related payments for closed
locations. Severance utilization represents payments made to terminated
employees during the period.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2003, we recorded net
adjustments of $5.8 million primarily related to reversals of
previously accrued vacancy related costs due to favorable results of
terminating and subleasing certain locations. During fiscal 2002, we
recorded net adjustments of $13.7 million primarily related to
reversals of previously accrued vacancy related costs due to the
following:
o Favorable results of assigning leases at certain locations of $7.2
million;
o The decision to continue to operate one of the stores previously
identified for closure due to changes in the competitive
environment in the market in which that store is located of $3.3
million; and
o The decision to proceed with development at a site that we had
chosen to abandon at the time of the original charge due to
changes in the competitive environment in the market in which that
site is located of $3.3 million.
As of September 6, 2003, we paid approximately $54 million of the total original
severance and benefits charge recorded, which resulted from the termination of
approximately 4,500 employees. The remaining severance liability primarily
relates to future obligations for early withdrawal from multi-employer union
pension plans and individual severance payments which will be paid by the end of
fiscal 2003.
At September 6, 2003, approximately $16.0 million of the liability was included
in "Other accruals" and the remaining amount was included in "Other non-current
liabilities" on our Consolidated Balance Sheets.
Included in our Consolidated Statements of Operations for the 12 and 28 weeks
ended September 6, 2003 and September 7, 2002 are the sales and operating
results of the aforementioned stores while they were open during the periods
presented. The results of these operations are as follows:
12 Weeks Ended 28 Weeks Ended
------------------------------- -------------------------------
Sept. 6, Sept. 7, Sept. 6, Sept. 7,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Sales $ - $ 7,434 $ 316 $ 26,546
============= ============ ============= =============
Operating loss $ - $ (932) $ (72) $ (2,220)
============= ============ ============= =============
Based upon current available information, we evaluated the liability balance as
of September 6, 2003 of $91 million and have concluded that it is adequate. We
will continue to monitor the status of the vacant properties and adjustments to
the reserve balance may be recorded in the future, if necessary.
LIQUIDITY AND CAPITAL RESOURCES
We had negative working capital of $83 million at September 6, 2003 compared to
positive working capital of $9 million at February 22, 2003. We had cash and
cash equivalents aggregating $183 million at September 6, 2003 compared to $199
million at the end of fiscal 2002. The decrease in working capital was
attributable primarily to the following:
o A decrease in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows;
o A decrease in inventories primarily relating to seasonality and the closure
of our Kohl's stores;
o An increase in accounts payable (inclusive of book overdrafts); and
o An increase in other accruals.
Partially offset by the following:
o An increase in accounts receivable due to timing of receipts and insurance
recoveries; and
o An increase in prepaid expenses and other current assets due to the
amortization of prepaid rent.
At September 6, 2003, we had a $425 million secured revolving credit agreement
(as amended, the "Secured Credit Agreement") with a syndicate of lenders
enabling us to borrow funds on a revolving basis sufficient to refinance
short-term borrowings and provide working capital as needed. This agreement is
comprised of a U.S. credit agreement amounting to $340 million and a Canadian
credit agreement amounting to $85 million (C$116.4 million at September 6, 2003)
and is collateralized primarily by inventory and company-owned real estate.
Borrowings under the Secured Credit Agreement bear interest based on LIBOR and
Prime interest rate pricing. Under the Secured Credit Agreement, $40 million of
the loan commitments expire in December 2003 and $385 million of the loan
commitments expire in June 2005.
As of September 6, 2003, we had $16.0 million in borrowings under the Secured
Credit Agreement. Accordingly, as of September 6, 2003, after reducing
availability for outstanding letters of credit and borrowing base requirements,
we had $231 million available under the Secured Credit Agreement.
Our loan agreements and certain notes contain various financial covenants, which
require among other things, minimum fixed charge coverage (compares EBITDA plus
rent and interest plus rents) and levels of leverage (compares EBITDA with
outstanding indebtedness under the agreement) and capital expenditures. On
February 21, 2003, we amended the Secured Credit Agreement in order to allow for
greater flexibility for fiscal year 2003. The amendment is effective through and
including the first quarter of fiscal year 2004 and includes, among other
things, a change to the fixed coverage ratio from 1.4 to 1.15, a senior secured
leverage ratio of 1.80, a waiver of the total leverage ratio, a minimum EBITDA
level and a limitation on capital expenditures. Certain of the covenants are
impacted by the amount of proceeds we receive from asset sales. At September 6,
2003, we were in compliance with all of our covenants.
During the 28 weeks ended September 7, 2002, we repurchased in the open market
$38 million of our 7.75% Notes due April 15, 2007. The cost of this open market
repurchase resulted in a pretax loss due to the early extinguishment of debt of
$0.7 million. In accordance with SFAS No. 145, "Rescission of FASB Statements 4,
44 and 64, Amendment of FASB 13, and Technical Corrections", this loss has been
reclassified within income from operations for the 28 weeks ended September 7,
2002. Under the recently amended Secured Credit Agreement, we are restricted
from making additional unscheduled repurchases of bonds.
We currently have active Registration Statements dated January 23, 1998 and June
23, 1999, allowing us to offer up to $75 million of debt and/or equity
securities as of June 14, 2003 at terms contingent upon market conditions at the
time of sale.
During the 28 weeks ended September 6, 2003, our capital expenditures and debt
repayments were funded through internally generated funds combined with proceeds
from disposals of properties. Capital expenditures totaled $76 million during
the 28 weeks ended September 6, 2003, which included 11 new supermarkets and
enlarging or remodeling 2 supermarkets.
For the remainder of fiscal 2003, we have planned capital expenditures of
approximately $100 million. These expenditures relate primarily to opening
approximately 10 new supermarkets and enlarging or remodeling 10 - 15
supermarkets. We currently expect to close approximately 5 - 10 stores during
the remainder of fiscal 2003; the long lived assets of which have been evaluated
for impairment in fiscal 2002. However, we periodically review our store base
and may make decisions to increase the number of store closures in the future.
The long lived assets of such possible closures would be evaluated for
impairment in the period in which such decisions are made.
We do not expect to pay dividends during fiscal 2003.
We are the guarantor of a loan of $2.3 million related to a shopping center,
which will expire in 2011.
Our existing senior debt rating was B3 with negative implications with Moody's
Investors Service ("Moody's") and B with negative implications with Standard &
Poor's Ratings Group ("S&P") as of September 6, 2003. Future rating changes
could affect the availability and cost of financing to the Company.
We believe that our cash from operations and asset sales will be sufficient for
our capital expenditure programs and mandatory scheduled debt repayments for the
next twelve months. However, certain external factors such as unfavorable
economic conditions, competition, labor relations and fuel and utility costs
could have a significant impact on cash generation. We are exploring several
actions to mitigate the potential risk, however, there can be no assurance that
such actions will be successful.
CRITICAL ACCOUNTING ESTIMATES
- -----------------------------
Critical accounting estimates are those accounting estimates that we believe are
important to the portrayal of our financial condition and results of operations
and require our most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Self-Insurance Reserves
- -----------------------
Our Consolidated Balance Sheets include liabilities with respect to self-insured
workers' compensation and general liability claims. We estimate the required
liability of such claims on a discounted basis, utilizing an actuarial method,
which is based upon various assumptions, which include, but are not limited to,
our historical loss experience, projected loss development factors, actual
payroll and other data. The required liability is also subject to adjustment in
the future based upon the changes in claims experience, including changes in the
number of incidents (frequency) and changes in the ultimate cost per incident
(severity).
Long-Lived Assets
- -----------------
We review the carrying values of our long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. Such review is based upon groups of assets and
the undiscounted estimated future cash flows from such assets to determine if
the carrying value of such assets are recoverable from their respective cash
flows. If such review indicates an impairment exists, we measure such impairment
on a discounted basis using a probability weighted average approach and a risk
free rate.
We also review individual assets for impairment upon determination that such
assets will not be used for their intended useful life. During the 12 and 28
weeks ended September 6, 2003, we recorded impairment losses on property, plant
and equipment of $4.2 million and $19.4 million, respectively, of which $0.5
million in both periods presented related to U.S. Retail stores that were or
will be closed in the normal course of business and are included in "Store
operating, general and administrative expense" in our Consolidated Statements of
Operations. The remaining impairment losses we recorded of $3.7 million and
$18.9 million during the 12 and 28 weeks ended September 6, 2003, respectively,
related to stores closed as a result of our exit of the Kohl's business and are
included in our Consolidated Statements of Operations under the caption "(Loss)
income from operations of discontinued businesses, net of tax" (see Note 2 of
our Consolidated Financial Statements). Based upon current trends, there may be
additional future impairments on long lived assets, including the potential for
impairment of assets that are held and used.
Excess of Cost over Net Assets Acquired
- ---------------------------------------
In accordance with SFAS 142 "Goodwill and Other Intangible Assets," the excess
of cost over fair value of net assets acquired is no longer required to be
amortized, but tested for impairment at least annually by reassessing the
appropriateness of the goodwill balance based on forecasts of cash flows from
operating results on a discounted basis in comparison to the carrying value of
such operations. If the results of such comparison indicate that an impairment
may exist, we determine the implied fair market value of the goodwill using a
purchase price allocation approach and compare this value to the balance sheet
value. If such comparison indicates that an impairment exits, we will recognize
a charge to operations at that time based upon the difference between the
implied fair market value of the goodwill and the balance sheet value. The
recoverability of goodwill is at risk to the extent we are unable to achieve our
forecast assumptions regarding cash flows from operating results. If current
operating trends continue, it is possible we may need to record an impairment
charge to reduce the carrying value of goodwill.
Closed Store Reserves
- ---------------------
For stores closed that are under long-term leases, we record a discounted
liability using a risk free rate for the future minimum lease payments and
related costs, such as utilities and taxes, from the date of closure to the end
of the remaining lease term, net of estimated probable recoveries from projected
sublease rentals. If estimated cost recoveries exceed our liability for future
minimum lease payments, the excess is recognized as income over the term of the
sublease. We estimate future net cash flows based on our experience in and our
knowledge of the market in which the closed store is located. However, these
estimates project net cash flow several years into the future and are affected
by variable factors such as inflation, real estate markets and economic
conditions. While these factors have been relatively stable in recent years,
variation in these factors could cause changes to our estimates. As of September
6, 2003, we had liabilities for future minimum lease payments of $161 million,
which related to 123 dark stores and 42 subleased or assigned stores. Of this
amount, $50 million relates to stores closed in the normal course of business,
$85 million relates to stores closed as part of the asset disposition initiative
(see Note 7 of our Consolidated Financial Statements) and $26 million relates to
stores closed as part of our exit of the northern New England and Kohl's
businesses (see Note 2 of our Consolidated Financial Statements).
Employee Benefit Plans
- ----------------------
The determination of our obligation and expense for pension and other
post-retirement benefits is dependent, in part, on our selection of certain
assumptions used by our actuaries in calculating these amounts. These
assumptions are disclosed in Note 10 of our Fiscal 2002 Annual Report on Form
10-K and include, among other things, the discount rate, the expected long-term
rate of return on plan assets and the rates of increase in compensation and
health care costs. In accordance with U.S. GAAP, actual results that differ from
our Company's assumptions are accumulated and amortized over future periods and,
therefore, affect our recognized expense and recorded obligation in such future
periods. While we believe that our assumptions are appropriate, significant
differences in our actual experience or significant changes in our assumptions
may materially affect our pension and other post-retirement obligations and our
future expense.
Inventories
- -----------
Store inventories are valued principally at the lower of cost or market with
cost determined under the retail method on a first-in, first-out basis.
Warehouse and other inventories are valued primarily at the lower of cost or
market with cost determined on a first-in, first-out basis. Inventories of
certain acquired companies are valued using the last-in, first-out method, which
was their practice prior to acquisition. We evaluate inventory shrinkage
throughout the year based on actual physical counts in our stores and
distribution centers and record reserves based on the results of these counts to
provide for estimated shrinkage between the store's last inventory and the
balance sheet date.
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
- -----------
Market risk represents the risk of loss from adverse market changes that may
impact our consolidated financial position, results of operations or cash flows.
Among other possible market risks, we are exposed to such risk in the areas of
interest rates and foreign currency exchange rates.
From time to time, we may enter hedging agreements in order to manage risks
incurred in the normal course of business including forward exchange contracts
to manage our exposure to fluctuations in foreign exchange rates.
Interest Rates
- --------------
Our exposure to market risk for changes in interest rates relates primarily to
our debt obligations. We do not have cash flow exposure due to rate changes on
our $681 million in notes as of September 6, 2003 because they are at fixed
interest rates. However, we do have cash flow exposure on our committed bank
lines of credit due to our variable floating rate pricing. Accordingly, during
the 12 and 28 weeks ended September 6, 2003, a presumed 1% change in the
variable floating rate would have impacted interest expense by nil and $0.2
million, respectively.
During fiscal 2002, we had three interest rate swaps with commercial banks with
an aggregate notional amount of $150 million maturing on April 15, 2007,
designated as fair value hedging instruments, to effectively convert a portion
of our 7.75% Notes due April 15, 2007 from fixed rate debt to floating rate
debt. In January 2003, these hedging instruments were terminated, resulting in a
gain of $10.2 million. This gain has been deferred and is being amortized as an
offset to interest expense over the life of the underlying debt instrument. Such
amount is classified as "Long term debt" in our Consolidated Balance Sheets.
Foreign Exchange Risk
- ---------------------
We are exposed to foreign exchange risk to the extent of adverse fluctuations in
the Canadian dollar. During the 12 and 28 weeks ended September 6, 2003, a
change in the Canadian currency of 10% would have resulted in a fluctuation in
net income of $1.0 million and $2.2 million, respectively. We do not believe
that a change in the Canadian currency of 10% will have a material effect on our
financial position or cash flows.
ITEM 4 - Controls and Procedures
Our Company maintains a system of internal controls and procedures designed to
provide reasonable assurance as to the reliability of our Company's published
consolidated financial statements and other disclosures included in this report.
Within the 90-day period prior to the date of this report, the Company's
Chairman of the Board, President and Chief Executive Officer, and Senior Vice
President, Chief Financial Officer evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to Rule
13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the
Company's Chairman of the Board, President and Chief Executive Officer, and
Senior Vice President, Chief Financial Officer concluded that our Company's
disclosure controls and procedures are effective to ensure that our Company is
able to collect, process and disclose the information we are required to
disclose in the report we file with the Securities and Exchange Commission
within the required time periods.
Since the date of the most recent evaluation of our Company's internal controls
over financial reporting by our Chairman of the Board, President and Chief
Executive Office, and Senior Vice President, Chief Financial Officer, there have
been no significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
CAUTIONARY NOTE
- ---------------
This presentation may contain forward-looking statements about the future
performance of our Company, and is based on our assumptions and beliefs in light
of information currently available. We assume no obligation to update this
information. 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 our principal markets; our
relationships with our employees; the terms of future collective bargaining
agreements; the costs and other effects of lawsuits and administrative
proceedings; the nature and extent of continued consolidation in the food
industry; changes in the financial markets which may affect our cost of capital
or the ability to access capital; supply or quality control problems with our
vendors; and changes in economic conditions, which may affect the buying
patterns of our customers.
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings
In May of 1999, four present and former employees of The Food Emporium filed
suit against our Company in federal court in New York for unpaid wages and
overtime. In April 2000, the judge certified the case as a class action status
for this case covering approximately 82 stores in 9 counties in the New York
metropolitan area. Approximately 840 current and former full and part-time
employees of The Food Emporium and A&P opted into the class. In April 2003, the
Company filed a Motion to Decertify the Collective Action under the Fair Labor
Standards Act.
In April 2002, three Canadian Food Basics franchisees commenced a breach of
contract action in a Canadian court against The Great Atlantic & Pacific Company
of Canada, Limited ("A&P Canada") as representative plaintiffs for a purported
class of approximately 70 current and former Canadian Food Basics franchisees.
The lawsuit seeks unspecified damages in connection with A&P Canada's alleged
failure to distribute to the franchisees the full amount of vendor allowances
and/or rebates to which the franchisees claim they are entitled under the
operative franchise agreements. A&P Canada disputes the plaintiff-franchisees'
claim and has filed a counterclaim seeking to recover subsidies made by it to
the plaintiffs. The lawsuit was certified as a class action in December 2002.
The majority of the potential class members have opted out of this class
proceeding. A&P Canada has obtained leave to appeal the class certification
order. The appeal hearing took place on June 26, 2003 and June 27, 2003. The
appeal court has not yet rendered its decision.
On June 5, 2002, a purported securities class action Complaint was filed in the
United States District Court for the District of New Jersey against our Company
and certain of our officers and directors in an action captioned Brody v. The
Great Atlantic & Pacific Tea Co., Inc., No. 02 CV 2674 (FSH). The Brody lawsuit
and four subsequently-filed related lawsuits were consolidated into a single
lawsuit captioned In re The Great Atlantic & Pacific Tea Company, Inc.
Securities Litigation, No. 02 CV 2674 (FSH) (the "Class Action Lawsuit"). On
December 2, 2002, plaintiffs filed their Consolidated Amended Class Action
Complaint (the "Complaint"), which alleged claims under Sections 10(b) (and Rule
10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934
arising out of our Company's July 5, 2002 filing of restated financial
statements for fiscal 1999, fiscal 2000 and the first three quarters of fiscal
2001. The Complaint in the Class Action Lawsuit sought unspecified money
damages, costs and expenses. On January 17, 2003, defendants filed a motion
seeking to dismiss the Complaint. On February 28, 2003, plaintiffs filed their
brief in opposition to defendants' motion. Defendants' reply brief in support of
their dismissal motion was filed on March 28, 2003. By Opinion & Order entered
on September 18, 2003, the Court dismissed plaintiffs' Complaint without
prejudice. The Court ultimately imposed an October 7, 2003 deadline by which
plaintiffs' Second Amended Complaint had to be filed. On October 1, 2003,
defendants filed a motion requesting that the Court reconsider the portion of
its September 18, 2003 Opinion & Order which granted plaintiffs' leave to
further amend. By letter dated October 8, 2003, plaintiffs advised the Court
that they did not intend to file a Second Amended Complaint and, in fact, no
Second Amended Complaint was filed by that deadline. On October 13, 2003,
plaintiffs filed a Notice of Appeal advising that they are appealing to the
United States Court of Appeals for the Third Circuit from the District Court's
September 18, 2003 Opinion & Order.
ITEM 2 - Changes in Securities
None
ITEM 3 - Defaults Upon Senior Securities
None
ITEM 4 - Submission of Matters to a Vote of Security Holders
At our annual meeting of shareholders, held July 16, 2003, there were 35,436,829
shares or 92.0% of the 38,515,806 shares outstanding and entitled to vote
represented either in person or by proxy.
The 9 Board of Directors nominated to serve for a one-year term were all
elected, with each receiving an affirmative vote of at least 81.2% of the shares
present.
Stockholder Proposal No. 1 for a Stockholder Vote on Poison Pills was voted
against by 75.9% of the total shares cast.
Stockholder Proposal No. 2 for a Stockholder Vote on Annual Meeting Locations
was voted against by 94.8% of the total shares cast.
ITEM 5 - Other Information
None
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION
---------- -----------
3.1 Articles of Incorporation of The Great Atlantic
& Pacific Tea Company, Inc., as amended
through July 1987 (incorporated herein by
reference to Exhibit 3(a) to Form 10-K filed on
May 27, 1988)
3.2 By-Laws of The Great Atlantic & Pacific Tea
Company, Inc., as amended through July 2, 2002
(incorporated herein by reference to Exhibit 3.2
to Form 10-K filed on July 5, 2002)
4.1 Indenture, dated as of January 1, 1991 between
the Company and JPMorgan Chase Bank (formerly The
Chase Manhattan Bank as successor by merger to
Manufacturers Hanover Trust Company), as trustee
(the "Indenture") (incorporated herein by
reference to Exhibit 4.1 to Form 8-K)
4.2 First Supplemental Indenture, dated as of
December 4, 2001, to the Indenture, dated as of
January 1, 1991 between our Company and JPMorgan
Chase Bank, relating to the 7.70% Senior Notes
due 2004 (incorporated herein by reference to
Exhibit 4.1 to Form 8-K filed on December 4,
2001)
4.3 Second Supplemental Indenture, dated as of
December 20, 2001, to the Indenture between our
Company and JPMorgan Chase Bank, relating to the
9 1/8% Senior Notes due 2011 (incorporated herein
by reference to Exhibit 4.1 to Form 8-K filed on
December 20, 2001)
4.4 Successor Bond Trustee (incorporated herein by
reference to Exhibit 4.4 to Form 10-K filed
on May 9, 2003)
10.1 Employment Agreement, made and entered into as of
the 11th day of November, 2002, by and between
our Company and Eric Claus, and Offer Letter
dated the 22nd day of October, 2002 (incorporated
herein by reference to Exhibit 10.1 to Form 10-Q
filed on January 10, 2003)
10.2 Employment Agreement, made and entered into as of
the 1st day of November, 2000, by and between the
Company and William P. Costantini (incorporated
herein by reference to Exhibit 10 to Form 10-Q
filed on January 16, 2001) ("Costantini
Agreement")
10.3 Amendment to Costantini Agreement dated April
30, 2002 (incorporated herein by reference to
Exhibit 10.7 to Form 10-K filed on July 5, 2002)
10.4 Employment Agreement, made and entered into as of
the 24th day of February, 2002, by and between
our Company and Mitchell P. Goldstein
(incorporated herein by reference to Exhibit 10.8
to Form 10-K filed on July 5, 2002)
10.5 Employment Agreement, made and entered into as
of the 2nd day of October, 2002, by and between
our Company and Peter Jueptner (incorporated
herein by reference to Exhibit 10.26 to
Form 10-Q filed on October 22, 2002)
10.6 Offer Letter dated the 18th day of September
2002, by and between our Company and Peter
Jueptner (incorporated herein by reference to
Exhibit 10.10 to Form 10-Q filed on January
10, 2003)
10.7 Employment Agreement, made and entered into as of
the 14th day of May, 2001, by and between our
Company and John E. Metzger, as amended February
14, 2002 (incorporated herein by reference to
Exhibit 10.13 to Form 10-K filed on July 5, 2002)
10.8 Employment Agreement, made and entered into as
of the 28th day of October, 2002, by and
between our Company and Brian Piwek, and Offer
Letter dated the 23rd day of October, 2002
(incorporated herein by reference to Exhibit
10.14 to Form 10-Q filed on January 10, 2003)
10.9 Employment Agreement, made and entered into as
of the 16th day of June, 2003, by and between
our Company and Brenda Galgano, as filed herein
10.10 Supplemental Executive Retirement Plan effective
as of September 30, 1991 (incorporated
herein by reference to Exhibit 10.B to Form 10-K
filed on May 28, 1993)
10.11 Supplemental Executive Retirement Plan effective
as of September 1, 1997 (incorporated herein by
reference to Exhibit 10.B to Form 10-K filed on
May 27, 1998)
10.12 Supplemental Retirement and Benefit Restoration
Plan effective as of January 1, 2001
(incorporated herein by reference to Exhibit
10(j) to Form 10-K filed on May 23, 2001)
10.13 1994 Stock Option Plan (incorporated herein by
reference to Exhibit 10(e) to Form 10-K filed on
May 24, 1995)
10.14 1994 Stock Option Plan for Non-Employee
Directors (incorporated herein by reference to
Exhibit 10(f) to Form 10-K filed on May 24, 1995)
10.15 Directors' Deferred Payment Plan adopted May 1,
1996 (incorporated herein by reference to
Exhibit 10(h) to Form 10-K filed on May 16, 1997)
10.16 1998 Long Term Incentive and Share Award Plan
(incorporated herein by reference to Exhibit
10(k) to Form 10-K filed on May 19, 1999)
10.17 Credit Agreement dated as of February 23, 2001,
among our Company, The Great Atlantic & Pacific
Company of Canada, Limited and the other
Borrowers party hereto and the Lenders party
hereto, The Chase Manhattan Bank, as U.S.
Administrative Agent, and The Chase Manhattan
Bank of Canada, as Canadian Administrative Agent
("Credit Agreement") (incorporated herein by
reference to Exhibit 10 to Form 10-K filed on May
23, 2001)
10.18 Amendment No. 1 and Waiver, dated as of November
16, 2001 to Credit Agreement (incorporated
herein by reference to Exhibit 10.23 to Form
10-K filed on July 5, 2002)
10.19 Amendment No. 2 dated as of March 21, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.24 to Form 10-K filed
on July 5, 2002)
10.20 Amendment No. 3 dated as of April 23, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.25 to Form 10-K filed on
July 5, 2002)
10.21 Waiver dated as of June 14, 2002 to Credit
Agreement (incorporated herein by reference to
Exhibit 10.26 to Form 10-K filed on July 5, 2002)
10.22 Amendment No. 4 dated as of October 10, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.27 to Form 10-Q filed on
October 22, 2002)
10.23 Amendment No. 5 dated as of February 21, 2003 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.1 to Form 8-K filed on
March 7, 2003)
10.24 Amendment No. 6 dated as of March 25, 2003 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.28 to Form 10-K filed on
May 9, 2003)
23.1 Consent of Independent Accountants from
PricewaterhouseCoopers LLP (incorporated herein
by reference to Exhibit 23.1 to Form 10-K filed
on May 9, 2003)
23.2 Independent Auditors' Consent from Deloitte &
Touche LLP (incorporated herein by reference
to Exhibit 23.2 to Form 10-K filed on May 9,
2003)
(b) Reports on Form 8-K
On July 25, 2003, our Company filed a Form 8-K pursuant to which it furnished
the SEC with a copy of the July 25, 2003 press release, which announced the
Company's financial results for the quarter ended June 14, 2003.
The Great Atlantic & Pacific Tea Company, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
Dated: October 17, 2003 By: /s/ Brenda M. Galgano
----------------------------------------
Brenda M. Galgano, Vice President, Corporate
Controller (Chief Accounting Officer)
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Section 302 Certification
I, Christian W.E. Haub, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusion about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Christian W. E. Haub Date: October 17, 2003
- ------------------------
Christian W. E. Haub
Chairman of the Board,
President and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Section 302 Certification
I, Mitchell P. Goldstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusion about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Mitchell P. Goldstein Date: October 17, 2003
- -------------------------
Mitchell P. Goldstein
Senior Vice President,
Chief Financial Officer
Exhibit 32
Certification Accompanying Periodic Report
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. ss. 1350)
The undersigned, Christian W. E. Haub, Chairman of the Board, President and
Chief Executive Officer of The Great Atlantic & Pacific Tea Company, Inc.
("Company"), and Mitchell P. Goldstein, Senior Vice President and Chief
Financial Officer of the Company, each hereby certifies that (1) the Quarterly
Report of the Company on Form 10-Q for the period ended September 6, 2003 fully
complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and (2) the information contained in the Report fairly presents, in all
material respects, the financial condition and the results of operations of the
Company.
Dated: October 17, 2003 /s/ Christian W. E. Haub
------------------------
Christian W. E. Haub
Chairman of the Board,
President and
Chief Executive Officer
Dated: October 17, 2003 /s/ Mitchell P. Goldstein
-------------------------
Mitchell P. Goldstein
Senior Vice President,
Chief Financial Officer