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 December 1, 2001
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 December 1, 2001 the Registrant had a total of 38,347,466 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 40 Weeks Ended
----------------------- ------------------------
Dec. 1, Dec. 2, Dec. 1, Dec 2,
2001 2000 2001 2000
----------- ---------- ---------- ----------
Sales $2,525,388 $2,428,790 $8,461,272 $8,068,144
Cost of merchandise sold (1,799,951) (1,740,230) (6,036,316) (5,755,986)
---------- ---------- ---------- ----------
Gross margin 725,437 688,560 2,424,956 2,312,158
Store operating, general
and administrative
expense (866,721) (690,744) (2,536,073) (2,264,120)
--------- --------- ---------- ----------
(Loss) income from
operations (141,284) (2,184) (111,117) 48,038
Interest expense (19,410) (23,240) (68,354) (74,308)
Interest income 1,450 1,472 5,184 4,762
--------- --------- --------- ---------
Loss before income taxes (159,244) (23,952) (174,287) (21,508)
Benefit from income taxes 66,757 9,439 71,430 7,205
--------- --------- ---------- --------
Net loss $(92,487) $(14,513) $(102,857) $(14,303)
======== ======== ========= ========
Loss per share:
Net loss per share -
basic and diluted $(2.41) $(0.38) $(2.68) $(0.37)
====== ====== ====== ======
Weighted average number
of common shares
outstanding - basic and
diluted * 38,347,225 38,347,216 38,347,219 38,347,216
========== ========== ========== ==========
* Common share equivalents for 2001 and 2000 have been excluded because they are
either antidilutive or zero.
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Stockholders' Equity and Comprehensive Loss
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Unamort-
ized Accumu-
Value of ulated
Addit- Restrict- Other Total
ional ed Retain- Compre- Stock
Common Paid-in Stock ed hensive holders'
Stock Capital Grant Earnings Loss Equity
------ ------- --------- -------- --------- -------
40 Week Period Ended December 1, 2001
- -------------------------------------
Balance at beginning
of period
38,347,216 shares $38,347 $456,470 $- $375,288 $(72,808) $797,297
Net loss (102,857) (102,857)
Other comprehensive loss:
Foreign currency
translation adjustment (1,214) (1,214)
Stock options exercised 2 2
------- -------- --- -------- ------- -------
Balance at end of
period $38,347 $456,472 $- $272,431 $(74,022) $693,228
======= ======== === ======== ======== ========
40 Week Period Ended December 2, 2000
- -------------------------------------
Balance at beginning
of period
38,367,216 shares $38,367 $457,101 $(441) $411,861 $(60,696) $846,192
Net loss (14,303) (14,303)
Other comprehensive loss:
Foreign currency
translation adjustment (12,179) (12,179)
Minimum pension
liability adjustment 2,682 2,682
Reversal of restricted
stock grants (20) (631) 441 (210)
Cash dividends
($.10 per share) (11,505) (11,505)
------- -------- ---- -------- -------- --------
Balance at end of
period $38,347 $456,470 $- $386,053 $(70,193) $810,677
======= ======== ==== ======== ======== ========
Comprehensive Loss
12 Weeks Ended 40 Weeks Ended
-------------------------- ---------------------
Dec. 1, Dec. 2, Dec. 1, Dec. 2,
2001 2000 2001 2000
------------ ------------ ---------- ---------
Net loss $(92,487) $(14,513) $(102,857) $(14,303)
Foreign currency
translation adjustment (940) (9,679) (1,214) (12,179)
Minimum pension liability
adjustment - - - 2,682
-------- ---------- --------- --------
Total comprehensive loss $(93,427) $(24,192) $(104,071) $(23,800)
======== ======== ========= ========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
December 1, February 24,
2001 2001
-------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and short-term investments $111,205 $131,550
Accounts receivable 202,875 183,382
Inventories 803,036 783,758
Prepaid expenses and other current assets 116,977 103,164
--------- ---------
Total current assets 1,234,093 1,201,854
--------- ---------
Property:
Property owned 1,634,167 1,805,255
Property leased under capital leases 77,530 84,758
--------- ---------
Property - net 1,711,697 1,890,013
Other assets 235,139 217,936
--------- ---------
Total assets $3,180,929 $3,309,803
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $4,073 $ 6,195
Current portion of obligations under
capital leases 10,852 11,634
Accounts payable 578,111 566,482
Book overdrafts 128,607 108,448
Accrued salaries, wages and benefits 162,348 158,450
Accrued taxes 66,657 62,169
Other accruals 222,693 194,106
--------- ---------
Total current liabilities 1,173,341 1,107,484
--------- ---------
Long-term debt 806,349 915,321
Long-term obligations under capital leases 94,226 106,797
Other non-current liabilities 413,785 382,904
--------- ---------
Total liabilities 2,487,701 2,512,506
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock - no par value;
authorized - 3,000,000
shares; issued - none - -
Common stock - $1 par value;
authorized - 80,000,000 shares;
issued and outstanding -
38,347,466 and 38,347,216 shares at
December 1, 2001 and February 24, 2001,
respectively 38,347 38,347
Additional paid-in capital 456,472 456,470
Accumulated other comprehensive loss (74,022) (72,808)
Retained earnings 272,431 375,288
--------- ---------
Total stockholders' equity 693,228 797,297
--------- ---------
Total liabilities and stockholders' equity $3,180,929 $3,309,803
========== ==========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Cash Flows
(Dollars in thousands)
(Unaudited)
40 Weeks Ended
--------------------------------
Dec. 1, 2001 Dec. 2, 2000
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(102,857) $(14,303)
Adjustments to reconcile net loss to
cash provided by operating activities:
Asset disposition initiative 172,474 -
Store/facilities exit charge reversal - (3,061)
Environmental charge - 4,029
Depreciation and amortization 204,953 195,047
Deferred income tax benefit (73,717) (9,992)
Loss (gain) on disposal of owned property 22 (1,634)
Other changes in assets and liabilities:
(Increase) decrease in receivables (20,429) 22,995
Increase in inventories (22,600) (87,561)
Increase in prepaid expenses and other
current assets (18,108) (3,727)
Decrease (increase) in other assets 4,609 (3,607)
Increase in accounts payable 15,811 44,521
Increase in accrued salaries, wages and benefits 4,635 3,772
Increase in accrued taxes 4,566 8,505
Decrease in other accruals and other liabilities (14,801) (44,218)
Other operating activities, net 3,872 4,481
------- -------
Net cash provided by operating activities 158,430 115,247
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (176,209) (325,729)
Proceeds from disposal of property 97,843 25,240
-------- -------
Net cash used in investing activities (78,366) (300,489)
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt 10,000 (17,000)
Proceeds under revolving lines of credit 1,092,412 511,471
Payments on revolving lines of credit (1,192,018) (326,556)
Proceeds from long-term borrowings 915 22,620
Payments on long-term borrowings (22,404) (3,125)
Principal payments on capital leases (9,030) (8,514)
Increase (decrease) in book overdrafts 20,419 (739)
Proceeds from stock option exercises 2 -
Cash dividends - (11,505)
--------- -------
Net cash (used in) provided by financing activities (99,704) 166,652
Effect of exchange rate changes on cash
and short-term investments (705) (2,073)
------- ------------
Net decrease in cash and short-term investments (20,345) (20,663)
Cash and short-term investments at beginning
of period 131,550 124,603
------- -------
Cash and short-term investments at end of period $111,205 $103,940
======== ========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements for the 12 and 40 week periods ended
December 1, 2001 and December 2, 2000 are unaudited, and in the opinion of
Management, all adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consisted only of normal
recurring items, except for the supply chain and business process strategic
initiatives and the asset disposition initiative as discussed herein and in the
Management's Discussion and Analysis section of this report. Interim results are
not necessarily indicative of results for a full year.
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries.
This Form 10-Q should be read in conjunction with the Company's consolidated
financial statements and notes incorporated by reference in the 2000 Annual
Report on Form 10-K.
2. Income Taxes
The income tax benefit recorded for the 12 and 40 week periods of fiscal years
2001 and 2000 reflects the Company's estimated expected annual tax rates applied
to its respective domestic and foreign financial results as well as a one-time
adjustment relating to an enacted federal tax rate reduction from the Canadian
government. This new legislation which became effective during the first quarter
of fiscal 2001 will reduce the Canadian federal corporate income tax rate by a
total of 7% from 28% to 21% by January 1, 2004. However, the tax benefit for the
40 weeks ended December 1, 2001 was decreased by $1.2 million to reflect the
reduction in value of the deferred Canadian tax asset (primarily relating to NOL
carryforwards) resulting from the lower rates. Excluding this adjustment of the
deferred tax asset, the benefit from income taxes would have been $72.6 million
or 41.7% of the loss before income taxes.
During the 40 weeks ended December 1, 2001, the Ontario government enacted
corporate income tax rate changes, gradually reducing the rate from 14% to 8% by
January 1, 2005. This additional Canadian tax rate reduction did not have a
significant impact on the financial statements for the 12 and 40 weeks ended
December 1, 2001.
3. Wholesale Franchise Business
As of December 1, 2001, the Company served 67 franchised stores. These
franchisees are required to purchase inventory exclusively from the Company,
which acts as a wholesaler to the franchisees. The Company had sales to these
franchised stores of $157 million and $152 million for the third quarters of
fiscal 2001 and 2000, respectively, and $518 million and $486 million for the 40
week periods ended in fiscal 2001 and 2000. In addition, the Company subleases
the stores and leases the equipment in the stores to the franchisees. The
Company also provides merchandising, advertising, accounting and other
consultative services to the franchisees for which it receives a fee, which
primarily represents the reimbursement of costs incurred to provide such
services.
The Company holds as assets inventory notes collateralized by the inventory in
the stores and equipment lease receivables collateralized by the equipment in
the stores. The current portion of the inventory notes and equipment leases, net
of allowance for doubtful accounts, amounting to approximately $2.1 million and
$3.7 million, are included in accounts receivable at December 1, 2001 and
February 24, 2001, respectively. The long-term portion of the inventory notes
and equipment leases amounting to approximately $46.6 million and $55.3 million
are included in other assets at December 1, 2001 and February 24, 2001,
respectively.
The repayment of the inventory notes and equipment leases are dependent upon
positive operating results of the stores. To the extent that the franchisees
incur operating losses, the Company establishes an allowance for doubtful
accounts. The Company continually assesses the sufficiency of the allowance on a
store by store basis based upon the operating results and the related collateral
underlying the amounts due from the franchisees. In the event of default by a
franchisee, the Company reserves the option to reacquire the inventory and
equipment at the store and operate the franchise as a corporate owned store.
4. New Accounting Pronouncements Not Yet Adopted
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets". This statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets. The
provisions of this statement are required to be applied by the Company starting
with fiscal 2002. This statement is required to be applied to all goodwill and
other intangible assets recognized in the Company's financial statements at the
date of adoption. At that time, goodwill will no longer be amortized, but will
be tested for impairment annually. Impairment losses for goodwill and
indefinite-lived intangible assets that arise due to the initial application of
this statement would be reported as resulting from a change in accounting
principle. The Company is currently assessing the impact this statement will
have on the Company's financial statements when it is adopted at the beginning
of fiscal 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting For Asset Retirement
Obligations". This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operation of a long-lived asset,
except for certain obligations of lessees. This standard requires entities to
record the fair value of a liability for an asset retirement obligation in the
period incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain of loss upon settlement. The Company is
required to adopt the provisions of SFAS No. 143 at the beginning of fiscal
2002. The Company has determined that the adoption of this statement will not
have a material impact on its financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". This statement also amends ARB No. 51, "Consolidated Financial
Statements", to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. This statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. This statement also broadens
the presentation of discontinued operations to include more disposal
transactions. The provisions of this statement are required to be adopted by the
Company at the beginning of fiscal 2002. The Company has not determined the
impact, if any, adoption of this statement will have on its financial position
or results of operations.
5. Asset Disposition Initiative
In May 1998, the Company initiated an assessment of its business operations in
order to identify the factors that were impacting the performance of the
Company. As a result of this assessment, in fiscal 1998, the Company recorded a
net charge of approximately $224 million related to the closure of 132 stores,
two warehouse facilities and a coffee plant in the U.S. and a bakery plant in
Canada. Additionally, in fiscal 1999 the Company recorded an additional charge
of $16 million, which included $5 million of net costs to exit the Atlanta
market (sale of 14 stores, two of which were included in the previously
announced closure, the closure of the 22 remaining stores, a distribution center
and administrative office) and $11 million for additional severance costs
related to the 132 stores closed in fiscal 1998.
The Company paid $28.6 million of the total net severance charges from the time
of the original charges through December 1, 2001, which resulted from the
termination of approximately 3,400 employees. The remaining severance liability
primarily relates to future obligations for early withdrawals from
multi-employer union pension plans.
The following reconciliation summarizes the activity related to the
aforementioned charges since the beginning of fiscal 2000:
(Dollars in thousands)
Severance
Store and Facilities
Occupancy Benefits Occupancy Total
------------ ------------ ------------ ------
Reserve Balance at
Feb. 26, 2000 $103,453 $ 7,500 $ 3,567 $114,520
Addition (1) 5,062 - - 5,062
Utilization (4) (25,654) (4,779) (463) (30,896)
Adjustment (3) - - (3,104) (3,104)
-------- ------- ------- -------
Reserve Balance at
Feb. 24, 2001 82,861 2,721 - 85,582
Addition (1) 3,259 - - 3,259
Utilization (2) (19,056) (433) - (19,489)
------- ------- ------- -------
Reserve Balance at
December 1, 2001 $67,064 $2,288 $- $69,352
======= ====== ====== =======
(1) The addition to store occupancy of $3.3 million during the 40 weeks ended
December 1, 2001 and $5.1 million during fiscal 2000, respectively,
represent the present value of accrued interest related to lease
obligations.
(2) Store occupancy utilization of $19.1 million represents lease and other
occupancy payments made during the 40 weeks ended December 1, 2001.
(3) At each balance sheet date, Management assesses the adequacy of the
reserve balance to determine if any adjustments are required as a result
of changes in circumstances and/or estimates. As a result, in fiscal 2000,
the Company recorded a net reduction in "Store operating, general and
administrative expense" of $3.1 million to reverse a portion of the $224
million net restructuring charge recorded in fiscal 1998. The reversal is
a result of a change in estimate resulting from the sale of one of the
Company's warehouses sold during the first quarter of fiscal 2000.
(4) Store occupancy utilization of $25.7 million and facilities occupancy of
$0.5 million represent lease and other occupancy payments made during
fiscal 2000.
Based upon current available information, Management evaluated the reserve
balance of $69.4 million as of December 1, 2001 and has concluded that it is
adequate. The Company will continue to monitor the status of the vacant
properties and further adjustments to the reserve balance may be recorded in the
future, if necessary.
At December 1, 2001, approximately $11.8 million of the reserve is included in
"Other accruals" and the remaining amount is included in "Other non-current
liabilities" in the Consolidated Balance Sheets.
Included in the Statements of Consolidated Operations for the 12 and 40 weeks
ended December 1, 2001 and December 2, 2000 are the operating results of the one
remaining store that was identified for closure as part of this store and
facilities exit plan. This store was closed during the second quarter of fiscal
2001. The operating results of this store are as follows:
(In thousands) 12 Weeks Ended 40 Weeks Ended
-------------------------- --------------------------
December 1, December 2, December 1, December 2,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales $ - $ 138 $ 197 $ 515
====== ====== ====== ======
Operating Loss $ - $ (44) $ (108) $ (115)
====== ====== ====== ======
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from Management's review of the performance and
potential of each of the Company's businesses and individual stores. At the
conclusion of this review, the Company determined that certain underperforming
operations, including 39 stores, should be closed and sold. As a result of these
decisions, the Company announced on November 14, 2001 that it would incur costs
of approximately $200 - $215 million pretax ($115 - $125 million after tax)
through the third quarter of fiscal 2002. Of this amount, $164.9 million pretax
($95.7 million after tax) was included in the Statements of Consolidated
Operations for the 40 week period ended December 1, 2001. The components of this
net pretax charge were as follows:
o $151.7 million of non-cash costs to close 39 stores (30 in the United States
and 9 in Canada) and certain other operations of which $63.5 million related
to the present value of future occupancy obligations, $85.0 million related
to net costs of disposing of fixed assets, $2.0 million related to severance
for store and administrative personnel and $1.2 million related to other
miscellaneous items;
o $20.8 million of non-cash costs to discontinue development of 4 potential
stores of which $16.9 million related to the present value of future
occupancy obligations, $3.5 million related to fixed asset write-offs and
$0.4 million related to occupancy costs incurred in the current period;
o $7.6 million in cash gains on the sale of other properties and equipment,
primarily land and buildings
Of this pretax charge, $0.2 million was included in "Cost of merchandise sold"
and $164.7 million was included in "Store operating, general and administrative
expense" in the Statements of Consolidated Operations for the 40 week period
ended December 1, 2001.
To the extent fixed assets included in the items noted above could be used in
other continuing operations, the Company will transfer those assets as needed.
Fixed assets that the Company can not transfer to other operations will be
scrapped. Accordingly, the write down recorded during the third quarter of
fiscal 2001 was based on expected transfers.
In addition to the charges recorded during the third quarter of fiscal 2001,
there were, and will continue to be, other charges related to the plan which
could not be accrued for at December 1, 2001 because they did not meet the
criteria for accrual under EITF 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit Activity (Including Certain Costs
Incurred in a Restructuring)". Such costs have been, and will continue to be,
expensed as incurred as the asset disposition is being executed. During the 12
and 40 weeks ended December 1, 2001, the Company incurred additional costs as
part of this asset disposition of $0.8 million and $1.0 million, respectively,
primarily related to non-accruable closing costs. These costs are included in
the charge described above, but excluded from the table below, which represents
only the reserve balance on the balance sheet.
As of December 1, 2001, the Company paid approximately $0.3 million of the total
severance charge recorded to date which resulted from the termination of
approximately 125 employees. The remaining individual severance payments will be
paid by the end of fiscal 2003.
The following reconciliation summarizes the activity related to the
aforementioned charges since their announcement in November 2001:
Severance Goodwill/
and Fixed
(Dollars in thousands) Occupancy Benefits Assets Total
------------ ------------ ----------- -----------
Original charge $80,456 $1,982 $81,519 $163,957
Addition (1) 400 - - 400
Utilization (2) - (342) (81,519) (81,861)
------- ------- ------- -------
Reserve Balance at
December 1, 2001 $80,856 $1,640 $- $82,496
======= ====== === =======
(1)The addition to store occupancy of $0.4 million represents the present
value of accrued interest related to lease obligations.
(2)Severance utilization of $0.3 million represents payments made to
terminated employees during the period. Goodwill/fixed asset utilization
of $81.5 million represents the writeoff of fixed assets of the operations
to be discontinued and the writeoff of goodwill related to the Barn
acquisition in Canada that was deemed to be impaired.
Based upon current available information, Management evaluated the reserve
balance of $82.5 million as of December 1, 2001 and has concluded that it is
adequate. The Company will continue to monitor the status of the vacant
properties and adjustments to the reserve balance may be recorded in the future,
if necessary.
At December 1, 2001, approximately $18.7 million of the reserve is included in
"Other accruals" and the remaining amount is included in "Other non-current
liabilities" in the Consolidated Balance Sheets.
Included in the Statements of Consolidated Operations for the 12 and 40 weeks
ended December 1, 2001 and December 2, 2000 are the sales and operating results
of the 39 stores that were identified for closure as part of this asset
disposition. The results of these operations are as follows:
(In thousands) 12 Weeks Ended 40 Weeks Ended
-------------------------- --------------------------
December 1, December 2, December 1, December 2,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales $68,875 $73,503 $236,549 $236,083
======= ======= ======== ========
Operating Loss $(6,265) $(6,886) $(21,072) $(18,348)
======= ======= ======== ========
6. 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. The Company's chief operating decision maker is the Chief
Executive Officer.
The Company currently operates in three reportable segments: United States
Retail, Canada Retail and Canada Wholesale. The retail segments are comprised of
retail supermarkets in the United States and Canada, while the wholesale segment
is comprised of the Company's Canadian operation that serves as the exclusive
wholesaler to the Company's franchised stores and serves as wholesaler to
certain third party retailers.
The accounting policies for the segments are the same as those described in the
summary of significant accounting policies included in the Company's Fiscal 2000
Annual Report. The Company measures segment performance based upon loss/income
from operations.
Interim information on segments is as follows:
(Dollars in thousands)
12 Weeks Ended 40 Weeks Ended
------------------------- ------------------------
Dec. 1, Dec. 2, Dec. 1, Dec. 2,
2001 2000 2001 2000
------------ ---------- ----------- ---------
Sales
U.S. Retail $1,952,948 $1,883,595 $6,560,141 $6,268,609
Canada Retail 415,671 393,467 1,382,679 1,313,545
Canada Wholesale 156,769 151,728 518,452 485,990
------------ ---------- ---------- ----------
Total Company $2,525,388 $2,428,790 $8,461,272 $8,068,144
========== ========== ========== ==========
Depreciation and amortization
U.S. Retail $53,527 $52,285 $177,915 $170,672
Canada Retail 8,170 7,311 27,038 24,375
Canada Wholesale - - - -
------- ------- -------- --------
Total Company $61,697 $59,596 $204,953 $195,047
======= ======= ======== ========
(Loss) income from operations
U.S. Retail $(149,561) $(9,281) $(143,200) $14,191
Canada Retail 2,115 1,554 12,141 17,681
Canada Wholesale 6,162 5,543 19,942 16,166
--------- ------- --------- -------
Total Company $(141,284) $(2,184) $(111,117) $48,038
========= ======= ========= =======
Loss before income taxes
U.S. Retail $(166,706) $(29,282) $(202,621) $(48,929)
Canada Retail 1,036 (518) 7,595 10,320
Canada Wholesale 6,426 5,848 20,739 17,101
--------- --------- --------- --------
Total Company $(159,244) $(23,952) $(174,287) $(21,508)
========= ======== ========= ========
Capital expenditures
U.S. Retail $38,320 $74,334 $140,375 $277,223
Canada Retail 14,408 9,752 35,834 48,506
Canada Wholesale - - - -
------- ------- -------- --------
Total Company $52,728 $84,086 $176,209 $325,729
======= ======= ======== ========
December 1, February 24,
2001 2001
------------ ------------
Total assets
U.S. Retail $2,557,306 $2,679,217
Canada Retail 546,567 548,801
Canada Wholesale 77,056 81,785
------------ ------------
Total Company $3,180,929 $3,309,803
========== ==========
7. Project Financing Agreement
On March 13, 2000, the Company announced an initiative to develop a
state-of-the-art supply and business management infrastructure.
During fiscal 2000, the Company entered into an agreement that provided
financing for software purchases and hardware leases up to $71 million in the
aggregate primarily relating to these initiatives. At that time, software
purchases and hardware leases were to be financed at an effective rate of 8.49%
per annum, were to occur from time to time through 2004 and were to have equal
monthly payments of $1.4 million. In May 2001, the agreement was amended to
include only hardware leases. The amounts previously funded, relating to
software purchases of approximately $29 million were to be repaid over the next
several months. Accordingly, as of December 1, 2001, approximately $26 million
had been repaid and $4 million was payable related to software and accrued
interest. Additionally, the monthly payment amount was amended to reflect
expected utilization related to hardware leases, and, as such, these payments
are expected to change based upon the timing and amount of such funding. As of
December 1, 2001, approximately $29 million had been funded related to hardware
leases, and as a result, approximately $13 million was available for future
financing. The leasing of the hardware under this agreement is being accounted
for as an operating lease in accordance with SFAS No. 13, "Accounting for
Leases".
8. Sale-Leaseback Transaction
During the fourth quarter of fiscal 2000, the Company sold 12 properties and
simultaneously leased them back from the purchaser. The properties subject to
this sale had a carrying value of approximately $68 million. Net proceeds
received by the Company related to this transaction amounted to approximately
$113 million. Of the 12 properties sold, 11 were sold for a profit resulting in
a gain after deducting expenses of approximately $45 million. This gain will be
deferred and amortized over the life of the respective leases as a reduction of
rental expense. One property in the aforementioned transaction was sold at a
loss of approximately $3 million after expenses. Since the fair value of this
property was less than its carrying value, the Company recognized this loss in
full during fiscal 2000.
During fiscal 2001 to date, the Company has sold 8 additional properties and
simultaneously leased them back from the purchaser. Of these 8 transactions in
fiscal 2001, 1 closed during the third quarter. The properties subject to this
sale had a carrying value of approximately $46 million. Net proceeds received by
the Company related to these transactions amounted to approximately $60 million.
Of the 8 properties sold, 5 were sold for a profit resulting in a gain after
deducting expenses of approximately $16 million. This gain will be deferred and
amortized over the life of the respective leases as a reduction of rental
expense. Three properties in the aforementioned transaction were sold at a loss
of approximately $4 million after expenses. The majority of this loss was
related to one of these properties, which was anticipated at the end of fiscal
2000, and, accordingly, was recognized in full at that time since the carrying
value of such property exceeded its fair value less the cost of disposal.
The Company expects to enter into similar transactions with other owned
properties from time to time in the future.
The resulting leases of the 20 properties sold in fiscal 2000 and 2001 have
terms ranging from 20 to 25 years, with options to renew for additional periods,
and are being accounted for as operating leases in accordance with SFAS No. 13,
"Accounting for Leases". Future minimum lease payments for these operating
leases are as follows:
(Dollars in thousands)
Fiscal
------
2001 $3,327
2002 19,964
2003 19,964
2004 19,964
2005 19,964
2006 and thereafter 325,763
-------
Total $408,946
========
9. Subsequent Events
On December 14, 2001, the Company issued $275 million 9 1/8% Senior Notes due
December 15, 2011. These notes pay interest semi-annually on June 15 and
December 15 and are callable beginning December 15, 2006. The Company used the
proceeds from the issuance of these notes to repay approximately $178 million of
the total $200 million 7.70% Senior Notes due January 15, 2004 and for general
corporate purposes including repayment of borrowings under the Company's secured
revolving credit agreement. The repayment of approximately $178 million of the
7.70% Senior Notes due January 15, 2004 took place in the form of a tender offer
whereby the Company paid a 6.25% premium to par. The premium plus costs to
tender will result in a fourth quarter extraordinary loss due to the early
extinguishment of debt of approximately $7 million after tax ($13 million
pretax).
On January 4, 2002, the Company entered into an interest rate swap with a
commercial bank with a notional amount of $50 million maturing on April 15,
2007. This swap effectively converts a portion of the Company's $300 million
7.75% Notes due April 15, 2007 from fixed rate debt to floating rate debt.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
12 Weeks Ended December 1, 2001 Compared to 12 Weeks Ended December 2, 2000
Sales for the 12 week period ended December 1, 2001 of $2,525 million increased
$97 million or 4.0% from sales of $2,429 million for the 12 week period ended
December 2, 2000. The increase in sales is due to increases in retail sales of
$92 million and wholesale sales of $5 million. The increase in retail sales is
attributable to the opening of 37 new stores since the beginning of the third
quarter of fiscal 2000, of which 15 were opened in fiscal 2001, increasing sales
by $98 million. Additionally, comparable store sales for the third quarter of
fiscal 2001, which include replacement stores, increased $67 million or 3.1%
when compared to the third quarter of fiscal 2000. This increase was partially
offset by the closure of 48 stores since the beginning of the third quarter of
fiscal 2000, of which 28 were closed in fiscal 2001, which decreased sales $57
million, and the unfavorable effect of the Canadian exchange rate, which
decreased sales $16 million. The increase in wholesale sales is attributable to
higher sales volume of $11 million partially offset by the unfavorable effect of
the Canadian exchange rate which decreased sales by $6 million.
Average weekly sales per supermarket were approximately $273,800 for the 12 week
period ended December 1, 2001 versus $260,100 for the corresponding period of
the prior year, an increase of 5.3%. Sales in the U.S. during the third quarter
of fiscal 2001 increased by $69.4 million or 3.7% compared to the third quarter
of fiscal 2000. Sales in Canada during the third quarter of fiscal 2001
increased $27.2 million or 5.0% compared to the third quarter of fiscal 2000.
Gross margin as a percentage of sales increased 38 basis points to 28.73% for
the 12 week period ended December 1, 2001 from 28.35% for the 12 week period
ended December 2, 2000. The gross margin dollar increase of $36.9 million
resulted from increases in sales volume and the gross margin rate partially
offset by a decrease in the Canadian exchange rate. Included in gross margin for
the 12 week period ended December 1, 2001 were costs related to the supply chain
and business process strategic initiatives of $0.7 million, which were incurred
to mark down inventory to be discontinued as a result of detailed category
management studies, and costs related to the Company's asset disposition
initiative of $0.2 million, which were incurred to mark down inventory in stores
announced for closure. Excluding the charges described above, as a percentage of
sales, gross margin would have been 28.76% for the 12 week period ended December
1, 2001.
Store operating, general and administrative expense ("SG&A") was $866.7 million
for the 12 week period ended December 1, 2001 compared to $690.7 million for the
corresponding period of the prior year. As a percentage of sales, SG&A increased
from 28.44% in the third quarter of fiscal 2000 to 34.32% in the third quarter
of fiscal 2001.
Included in SG&A for the 12 week period ended December 1, 2001 and December 2,
2000 are costs relating to the supply chain and business process strategic
initiatives of $22.6 million and $18.1 million, respectively. These costs
primarily included professional consulting fees and salaries, including related
benefits, of employees working full-time on the initiatives. Also included in
SG&A for the 12 week period ended December 1, 2001 are net costs relating to the
Company's asset disposition initiative of $164.5 million as described in Note 5
of the Consolidated Financial Statements. Excluding the charges described above,
as a percentage of sales, SG&A decreased from 27.69% for the 12 week period
ended December 2, 2000 to 26.91% for the 12 week period ended December 1, 2001.
Interest expense of $19.4 million for the third quarter of fiscal 2001 decreased
from the prior year quarter amount of $23.2 million. This was primarily due to
decreased borrowing requirements in the third quarter of fiscal 2001 compared to
fiscal 2000 as a result of lower capital expenditures, a reduction in working
capital and the proceeds received on the sale leaseback transaction described in
Note 8 of the Consolidated Financial Statements. The reduction is also partially
due to a decrease in interest rates.
The loss before income taxes for the 12 week period ended December 1, 2001 was
$159.2 million compared to a loss before income taxes of $23.9 million for the
comparable period in the prior year, a change of $135.3 million. This
fluctuation is attributable principally to the increase in SG&A resulting
primarily from the asset disposition charge partially offset by the increase in
gross margin and lower interest expense.
The benefit from income taxes for the 12 week period ended December 1, 2001 was
$66.7 million compared to a benefit from income taxes of $9.4 million in the
comparable period of fiscal 2000. The increase in benefit from income taxes is
primarily attributable to the asset disposition charge. The effective tax rates
for the third quarters of fiscal 2001 and 2000 were 41.9% and 39.4%,
respectively. These benefits from income taxes for the third quarters of fiscal
2001 and 2000 reflect the estimated expected annual tax rates applied to its
respective domestic and foreign financial results.
Based on these overall results, the net loss for the 12 week period ended
December 1, 2001 was $92.5 million or $2.41 per share - basic and diluted, as
compared to a net loss of $14.5 million or $0.38 per share - basic and diluted
in the prior year. The change in net loss from the third quarter of fiscal 2000
to the third quarter of fiscal 2001 is attributable principally to the asset
disposition charge partially offset by higher gross margin and lower interest
expense.
40 Weeks Ended December 1, 2001 Compared to 40 Weeks Ended December 2, 2000
Sales for the 40 weeks ended December 1, 2001 of $8,461 million increased $393
million or 4.9% from sales of $8,068 million for the 40 weeks ended December 2,
2000. The increase in sales is due to increases in retail sales of $361 million
and wholesale sales of $32 million. The increase in retail sales is attributable
to the opening of 47 new stores in fiscal 2000 and 15 new stores in fiscal 2001,
increasing sales by $391 million. Additionally, comparable store sales for the
40 weeks of fiscal 2001, which include replacement stores, increased $235
million or 3.2% when compared to the 40 weeks of fiscal 2000. This increase was
partially offset by the closure of 49 stores in fiscal 2000 and 28 stores in
fiscal 2001, which decreased sales $205 million, and the unfavorable effect of
the Canadian exchange rate which decreased sales $60 million. The increase in
wholesale sales is attributable to higher sales volume of $55 million partially
offset by the unfavorable effect of the Canadian exchange rate, which decreased
sales by $23 million.
Average weekly sales per supermarket were approximately $273,800 for the 40 week
period ended December 1, 2001 versus $259,800 for the corresponding period of
the prior year, an increase of 5.4%. Sales in the U.S. during the 40 weeks ended
December 1, 2001 increased by $291.5 million or 4.7% compared to fiscal 2000.
Sales in Canada during the 40 weeks ended December 1, 2001 increased $101.6
million or 5.6% compared to fiscal 2000.
Gross margin as a percentage of sales was 28.66% for the 40 week periods ended
December 1, 2001 and December 2, 2000. The gross margin dollar increase of
$112.8 million resulted from an increase in sales volume partially offset by
decreases in the gross margin rate and the Canadian exchange rate. Included in
gross margin for the 40 weeks ended December 1, 2001 were costs related to the
supply chain and business process strategic initiatives of $6.3 million which
were incurred to mark down inventory to be discontinued as a result of detailed
category management studies, and the Company's asset disposition initiative of
$0.2 million which were incurred to mark down inventory in stores announced for
closure. Excluding the charges described above, as a percentage of sales, gross
margin would have been 28.74% for the 40 week period ended December 1, 2001.
SG&A was $2,536.1 million for the 40 weeks ended December 1, 2001 compared to
$2,264.1 million for the corresponding period of fiscal 2000. As a percentage of
sales, SG&A increased from 28.06% for the 40 weeks ended December 2, 2000 to
29.97% for the 40 weeks ended December 1, 2001.
Included in SG&A for the 40 weeks ended December 1, 2001 and December 2, 2000
are costs relating to the supply chain and business process strategic
initiatives of $71.2 million and $52.2 million, respectively. These costs
primarily included professional consulting fees and salaries, including related
benefits, of employees working full-time on the initiatives. Also included in
SG&A for the 40 weeks ended December 1, 2001 are costs relating to the Company's
asset disposition initiative of $164.7 million as described in Note 5 of the
Consolidated Financial Statements. Also included in SG&A for the 40 weeks ended
December 2, 2000 was $4.0 million of estimated environmental clean up costs for
a non-retail property. Partially offsetting the fiscal 2000 expense was a
reversal of $3.1 million of charges related to the store closure initiative
originally recorded in fiscal 1998, resulting primarily from a change in
estimate related to the sale of a warehouse sold during the first quarter of
fiscal 2000. Excluding the charges described above, as a percentage of sales,
SG&A decreased from 27.40% for the 40 week period ended December 2, 2000 to
27.18% for the 40 week period ended December 1, 2001.
Interest expense of $68.4 million for the 40 week period ended December 1, 2001
decreased from the prior year amount of $74.3 million. This was due to decreased
borrowing requirements during fiscal 2001 compared to fiscal 2000 as a result of
lower capital expenditures, a reduction in working capital and the proceeds
received on the sale leaseback transaction described in Note 8 of the
Consolidated Financial Statements. The reduction is also partially due to a
decrease in interest rates.
The loss before income taxes for the 40 week period ended December 1, 2001 was
$174.3 million compared to a loss before income taxes of $21.5 million for the
comparable period in fiscal 2000, a decrease of $152.8 million. This fluctuation
is attributable principally to the increase in SG&A resulting primarily from the
asset disposition charge partially offset by the increase in gross margin and
lower interest expense.
The benefit from income taxes for the 40 weeks ended December 1, 2001 was $71.4
million compared to a benefit from income taxes of $7.2 million in the
comparable period of fiscal 2000. The increase in benefit from income taxes is
primarily attributable to the asset disposition charge. This benefit from income
taxes for the 40 weeks ended December 1, 2001 reflects the estimated expected
annual tax rates applied to its respective domestic and foreign financial
results, as well as an adjustment relating to a reduction in the Canadian
federal corporate income tax rate. This new legislation, which was enacted
during the first half of fiscal 2001, will reduce the Canadian federal corporate
income tax rate by a total of 7% from 28% to 21% by January 1, 2004. The tax
benefit for the 40 weeks ended December 1, 2001 was decreased by $1.2 million to
reflect the reduction in value of the deferred Canadian tax asset (primarily
relating to NOL carryforwards) resulting from the lower rates. Excluding this
adjustment of the tax asset, the benefit from income taxes would have been $72.6
million or 41.7% of the loss before income taxes.
During the 40 weeks ended December 1, 2001, the Ontario government enacted
corporate income tax rate changes, gradually reducing the rate from 14% to 8% by
January 1, 2005. This Canadian tax rate reduction did not have a significant
impact on the financial statements for the 40 weeks ended December 1, 2001.
Based on these overall results, the net loss for the 40 weeks ended December 1,
2001 was $102.9 million or $2.68 per share - basic and diluted, as compared to
net loss of $14.3 million or $0.37 per share - basic and diluted for the 40 week
period ended December 2, 2000. The change in net loss from the 40 weeks ended
December 2, 2000 to December 1, 2001 is attributable principally to the asset
disposition charge partially offset by higher gross margin and lower interest
expense.
Asset Disposition Initiative
As described in Note 5 of the Consolidated Financial Statements, during the
third quarter of fiscal 2001, the Company's Board of Directors approved a
plan resulting from Management's review of the performance and potential of
each of the Company's businesses and individual stores. At the conclusion
of this review, the Company determined that certain underperforming
operations, including 39 stores, should be closed and sold. As a result of
these decisions, the Company announced on November 14, 2001 that it would
incur costs of approximately $200 - $215 million pretax ($115 -
$125 million after tax). Of this amount, $164.9 million pretax ($95.7
million after tax) was included in the Statements of Consolidated
Operations for the 40 week period ended December 1, 2001. The components of
this net pretax charge were as follows:
o $151.7 million of non-cash costs to close 39 stores (30 in the United
States and 9 in Canada) and certain other operations of which $63.5 million
related to the present value of future occupancy obligations, $85.0 million
related to net costs of disposing of fixed assets, $2.0 million related to
severance for store and administrative personnel and $1.2 million related
to other miscellaneous items;
o $20.8 million of non-cash costs to discontinue development of 4 potential
stores of which $16.9 million related to the present value of future
occupancy obligations, $3.5 million related to fixed asset write-offs and
$0.4 million related to occupancy costs incurred in the current period;
o $7.6 million in cash gains on the sale of other properties and equipment,
primarily land and buildings
Liquidity and Capital Resources
The Company had working capital of $60.8 million at December 1, 2001 compared to
$94.4 million at fiscal 2000 year end. The Company had cash and short-term
investments aggregating $111.2 million at December 1, 2001 compared to $131.6
million at fiscal 2000 year end. The Company had no short-term investments at
December 1, 2001 or February 24, 2001. The decrease in working capital is
attributable primarily to increases in book overdrafts, accounts payable and
other accruals, as well as decreases in cash and prepaid expenses. This is
partially offset by increases in accounts receivable, inventories and deferred
tax asset.
The Company has a $425 million secured revolving credit agreement (the "Secured
Credit Agreement") expiring December 31, 2003, with a syndicate of lenders,
enabling it to borrow funds on a revolving basis sufficient to refinance
short-term borrowings and provide working capital as needed. This agreement is
secured primarily by inventory and company-owned real estate. The Secured Credit
Agreement was comprised of a U.S. credit agreement amounting to $340 million and
a Canadian credit agreement amounting to $85 million (C$134 million at December
1, 2001). As of December 1, 2001, the Company had $105 million of borrowings
under the Secured Credit Agreement. Accordingly, as of December 1, 2001, after
reducing availability for outstanding letters of credit and inventory
requirements, the Company had $292 million available under the Secured Credit
Agreement. Borrowings under the agreement bear interest at the weighted average
rate of 4.89% as of December 1, 2001 based on the variable LIBOR pricing.
On December 14, 2001, the Company issued $275 million 9 1/8% Senior Notes due
December 15, 2011. These notes pay interest semi-annually on June 15 and
December 15 and are callable beginning December 15, 2006. The Company used the
proceeds from the issuance of these notes to repay approximately $178 million of
the total $200 million 7.70% Senior Notes due January 15, 2004 and for general
corporate purposes including repayment of borrowings under the Company's secured
revolving credit agreement. The repayment of approximately $178 million of the
7.70% Senior Notes due January 15, 2004 took place in the form of a tender offer
whereby the Company paid a 6.25% premium to par. The premium plus costs to
tender will result in a fourth quarter extraordinary loss due to the early
extinguishment of debt of approximately $7 million after tax ($13 million
pretax).
On January 4, 2002, the Company entered into an interest rate swap with a
commercial bank with a notional amount of $50 million maturing on April 15,
2007. This swap effectively converts a portion of the Company's $300 million
7.75% Notes due April 15, 2007 from fixed rate debt to floating rate debt.
The Company's loan agreements and certain of its notes contain various financial
covenants that require, among other things, minimum fixed charge coverage and
maximum levels of leverage and capital expenditures. At December 1, 2001, the
Company was in compliance with the covenants on the notes and the Secured Credit
Agreement.
As described in Note 7 of the Consolidated Financial Statements, during fiscal
2000 an agreement was entered into which provided financing for software
purchases and hardware leases up to $71 million in the aggregate primarily
relating to the supply chain and business process strategic initiatives. At that
time, software purchases and hardware leases were to be financed at an effective
rate of 8.49% per annum, were to occur from time to time through 2004 and were
to have equal monthly payments of $1.4 million. In May 2001, the agreement was
amended to include only hardware leases. The amounts previously funded relating
to software purchases of approximately $29 million were to be repaid over the
next several months. Accordingly, as of December 1, 2001, approximately $26
million had been repaid and $4 million was payable related to software and
accrued interest. Additionally, the monthly payment amount was amended to
reflect expected utilization related to hardware leases, and, as such, these
payments are expected to change based upon the timing and amount of such
funding. As of December 1, 2001, approximately $29 million had been funded
related to hardware leases and, as a result, approximately $13 million was
available for future financing.
The Company has filed two Shelf Registration Statements dated January 23, 1998
and June 23, 1999, allowing it to offer up to $350 million of debt and/or equity
securities as of December 1, 2001 at terms determined by market conditions at
the time of sale. As described above and in Note 9 of the Consolidated Financial
Statements, on December 14, 2001 the Company issued $275 million 9 1/8% Senior
Notes due December 15, 2011. After this issuance, the Shelf Registration
Statements were reduced to $75 million.
As described in Note 8 of the Consolidated Financial Statements, during the
fourth quarter of fiscal 2000 the Company sold 12 properties and simultaneously
leased them back from the purchaser. Net proceeds received by the Company
related to this transaction amounted to approximately $113 million.
Additionally, during fiscal 2001 to date, the Company has sold 8 properties and
simultaneously leased them back from the purchaser. Of these 8 transactions in
fiscal 2001, 1 closed during the third quarter. Net proceeds received by the
Company related to these transactions amounted to approximately $60 million. The
Company expects to enter into similar transactions with other owned properties
from time to time in the future.
During the 40 weeks ended December 1, 2001, the Company funded its capital
expenditures, debt repayments and expenses related to the supply chain and
business process strategic initiatives through internally generated funds
combined with proceeds from disposals of property and revolving lines of credit.
Capital expenditures totaled $176 million during the 40 weeks ended December 1,
2001, which included 15 new supermarkets, 17 major remodels or enlargements and
the Company's capital expenditures related to the supply chain and business
process strategic initiatives. Capital expenditures are expected to be
approximately $75 million for the remainder of fiscal 2001, which includes
approximately 5 new supermarkets, as well as capital expenditures related to the
supply chain and business process strategic initiatives.
During the 40 weeks ended December 1, 2001, the Company incurred expenses
related to the supply chain and business process strategic initiatives of
approximately $78 million before tax benefits. For the remainder of fiscal 2001,
the Company plans to incur approximately an additional $20-$25 million in
expenses, before tax benefits, related to the supply chain and business process
strategic initiatives.
On December 5, 2000, the Board of Directors voted to discontinue payment of the
quarterly cash dividend on its common stock. As such, the Company does not
expect to pay dividends during fiscal 2001.
The Company's existing senior debt rating was B2 with negative implications with
Moody's Investors Service and BB with negative implications with Standard &
Poor's Ratings Group as of December 1, 2001. Future rating changes could affect
the availability and cost of financing to the Company.
The Company believes that its current cash resources, including the funds
available under the Secured Credit Agreement, together with cash generated from
operations, will be sufficient for the Company's supply chain and business
process strategic initiatives expenses, other capital expenditure programs and
mandatory scheduled debt repayments throughout the next twelve months.
Market Risk
Market risk represents the risk of loss from adverse market changes that may
impact the consolidated financial position, results of operations or cash flows
of the Company. Among other possible market risks, the Company is exposed to
such risk in the areas of interest rates and foreign currency exchange rates.
Interest rates
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's debt obligations. The Company has no cash flow
exposure due to rate changes on its $700 million in notes as of December 1, 2001
because they are at fixed interest rates. However, the Company does have cash
flow exposure on its committed and uncommitted bank lines of credit due to its
variable LIBOR pricing. Accordingly, as of December 1, 2001, a 1% change in
LIBOR would result in interest expense fluctuating approximately $1.1 million
per year.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. For the 12 and 40 week periods ended
December 1, 2001, a change in the Canadian currency of 10% would have resulted
in a fluctuation in net income of $0.4 million and $1.5 million, respectively.
The Company does not believe that a change in the Canadian currency of 10% will
have a material effect on the financial position or cash flows of the Company.
Cautionary Note
This report contains certain forward-looking statements about the future
performance of the Company which are based on Management's assumptions and
beliefs in light of the information currently available to it. The Company
assumes no obligation to update the information contained herein. These
forward-looking statements are subject to uncertainties and other factors that
could cause actual results to differ materially from such statements including,
but not limited to: competitive practices and pricing in the food industry
generally and particularly in the Company's principal markets; the Company's
relationships with its employees and the terms of future collective bargaining
agreements; the costs and other effects of legal and administrative cases and
proceedings; the nature and extent of continued consolidation in the food
industry; changes in the financial markets which may affect the Company's cost
of capital and the ability of the Company to access the public debt and equity
markets to refinance indebtedness and fund the Company's capital expenditure
programs on satisfactory terms; supply or quality control problems with the
Company's vendors and changes in economic conditions which affect the buying
patterns of the Company's customers.
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings
None
ITEM 2 - Changes in Securities
None
ITEM 3 - Defaults Upon Senior Securities
None
ITEM 4 - Submission of Matters to a Vote of Security Holders
None
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 Index:
Exhibit Incorporation by reference
Numbers Description (If applicable)
--------- ------------------------------ ------------------------
1) Underwriting Agreement Exhibit 1 to Form 8-K
filed December 20, 2001
2) Not Applicable
3) Articles of Incorporation and
By-Laws
a) Articles of Incorporation as Exhibit 3)a) to Form 10-K
amended through July 1987 for fiscal year ended
February 27, 1988
b) By-Laws as amended through Exhibit 3)b) to Form 10-K
March 1989 for fiscal year ended
February 25, 1989
4) Instruments defining the rights of Exhibit 4.1 to Form 8-K
security holders, including dated as of January 1,
indentures * 1991
Exhibit 4.1 to Form 8-K
filed December 4, 2001
Exhibit 4.1 to Form 8-K
December 20, 2001
* Agreements with respect to long-term debt where the total amount of
securities authorized thereunder does not exceed 10% of the total assets of
the Registrant and its subsidiaries on a consolidated basis shall be
furnished to the Commission on request.
Exhibit Index (continued):
Exhibit Incorporation by reference
Numbers Description (If applicable)
--------- ------------------------------ ------------------------
10) Material Contracts
a) Management Compensation and Exhibit 10)b) to Form 10-K
Termination Agreements for the fiscal years ended
February 25, 1989,
February 24, 1990,
Exhibit 10)a) for the
fiscal years ended
February 26, 1994,
February 25, 1995,
February 22, 1997,
February 28, 1998,
February 27, 1999,
February 26, 2000, and
Exhibit 10 of Form 10-Q
for the quarterly periods
ending June 17, 2000,
September 9, 2000
and December 2, 2000
b) Supplemental Executive Exhibit 10)b) to Form 10-K
Retirement Plan, amended for the fiscal years ended
and restated February 27, 1993,
February 28, 1998 and
attached
c) 1984 Stock Option Plan, Exhibit 10)e) to Form 10-K
as amended for the fiscal
year ended February 23,
1991
d) 1994 Stock Option Plan Exhibit 10)e) to Form 10-K
for the fiscal year ended
February 25, 1995
e) 1994 Stock Option Plan Exhibit 10)f) to Form 10-K
for Non-Employee Directors for the fiscal year ended
February 25, 1995
f) Directors' Deferred Exhibit 10)h) to Form 10-K
Payment Plan for the fiscal year ended
February 22, 1997
Exhibit Index (continued):
Exhibit Incorporation by reference
Numbers Description (If applicable)
--------- ------------------------------ ------------------------
g) Competitive Advance and Exhibit 10) to Form 8-K
Revolving Credit Facilities filed on June 12, 1997;
Agreement dated as of Exhibit 10)i) to Form 10-K
June 10, 1997 and amendment for the fiscal year ended
dated February 17, 1999 February 27, 1999
h) Project Great Renewal - Exhibit 99.1) to Form 8-K
Phase I dated as of filed December 9, 1998;
December 8, 1998; Phase II Exhibit 99) to Form 8-K
dated March 13, 2000 filed March 24, 2000
i) 1998 Long Term Incentive Exhibit 10)k) to Form 10-K
and Share Award plan for the fiscal year ended
February 27, 1999
j) Supplemental Retirement and
Benefit Restoration Plan
k) Credit Agreement dated as
of February 23, 2001
(b)Reports on Form 8-K
On December 20, 2001, the Company filed a report on Form 8-K containing (i)
an Underwriting Agreement dated December 14, 2001, relating to the Company's
issuance of $275,000,000 aggregate principal amount of 9 1/8% Senior Notes
due 2011, (ii) a form of Second Supplemental Indenture and (iii) a form of
Global Note.
On December 4, 2001, the Company filed a report on Form 8-K containing a
supplemental indenture, dated as of December 4, 2001, to the existing
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).
On December 3, 2001, the Company filed a report on Form 8-K containing a
prospectus supplement relating to the Company's offer of $225 million
aggregate principal amount of senior notes.
On November 14, 2001, the Company filed a report on Form 8-K containing a
press release regarding the Company's program to improve operating results by
disposing of underperforming assets and updates to its fiscal 2001 earnings
guidance.
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.
Date: January 15, 2002 By: /s/ Kenneth A. Uhl
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Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
The Great Atlantic & Pacific Tea Company, Inc.