Filed Pursuant to
Rule 424(B)(5)
File # 333-80347
PROSPECTUS SUPPLEMENT
(To Prospectus Dated June 21, 1999)
$275,000,000
s
[A&P LOGO]
9 1/8% Senior Notes
due 2011
- -------------------------------------------------------------------------------
This is an offering by The Great Atlantic & Pacific Tea Company, Inc. of its 9
1/8% Senior Notes due 2011. Interest is payable on June 15 and December 15 of
each year, beginning June 15, 2002.
We may redeem all or part of the notes on or after December 15, 2006. Before
December 15, 2004, we may redeem up to 35% of the aggregate principal amount
of the notes from the proceeds of certain equity offerings. Redemption prices
are set forth under "Description of the Notes--Optional Redemption."
The notes will be our senior unsecured obligations and will rank equal with
all of our existing and future unsecured senior debt and senior to any of our
future subordinated unsecured debt. The notes will effectively rank junior to
our existing and future secured debt as to the assets securing such debt. The
notes also will effectively rank junior to all existing and future obligations
of our subsidiaries.
Investing in the notes involves risks. "Risk Factors" begins on page S-10.
- -------------------------------------------------------------------------------
Per Note Total
-------- -----------
Public Offering Price ............................... 100.00% $275,000,000
Underwriting Discount ............................... 2.25% $ 6,187,500
Proceeds to A&P ..................................... 97.75% $268,812,500
Interest on the notes will accrue from December 20, 2001 to the date of
delivery.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
Lehman Brothers expects to deliver the notes on or about December 20, 2001,
subject to conditions.
- -------------------------------------------------------------------------------
LEHMAN BROTHERS
Sole Book-Running Manager
Joint Lead Manager
GOLDMAN, SACHS & CO.
Joint Lead Manager
MORGAN STANLEY
SCOTIA CAPITAL
December 14, 2001
[A&P logo] [photo omitted]
[A&P Map]
We operate 743 stores and 67 franchised locations under 11 banners and 4
operating regions. We hold a #1 or #2 position among food retailers in the New
York, Detroit and New Orleans metropolitan areas and Ontario, Canada based on
reported sales for fiscal 2000.
This document is in two parts. The first part is this prospectus supplement,
which describes the terms of this offering of the notes. The second part is
the accompanying prospectus, which gives more general information, some of
which may not apply to the notes.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer to sell these securities in any state where the offer or
sale is not permitted. You should assume that the information contained in
this prospectus supplement, the accompanying prospectus and the documents
incorporated by reference is accurate only as of their respective dates. Our
business, financial condition and results of operations and prospects may have
changed since those dates.
TABLES OF CONTENTS
Page
----
Prospectus Supplement
Forward-Looking Statements ............................................. S-2
Summary ................................................................ S-3
Risk Factors ........................................................... S-10
Use of Proceeds ........................................................ S-15
Capitalization ......................................................... S-15
Selected Historical Financial Data ..................................... S-16
Management's Discussion and Analysis of Financial Condition and Results
of Operations ......................................................... S-18
Business ............................................................... S-27
Management ............................................................. S-32
Description of Certain Indebtedness .................................... S-35
Description of the Notes ............................................... S-37
Certain United States Federal Income Tax Considerations ................ S-67
Underwriting ........................................................... S-71
Legal Matters .......................................................... S-72
Experts ................................................................ S-72
Incorporation of Certain Documents by Reference ........................ S-72
Index to Consolidated Financial Statements ............................. F-1
Prospectus
Where You Can Find More Information .................................... 3
Incorporation of Certain Documents by Reference ........................ 3
The Company ............................................................ 4
The Trusts ............................................................. 4
Use of Proceeds ........................................................ 5
Ratio of Earnings to Fixed Charges ..................................... 5
Description of Common Stock ............................................ 5
Description of Preferred Stock ......................................... 6
Description of Depositary Shares ....................................... 11
Description of Debt Securities ......................................... 14
Description of Securities Warrants ...................................... 21
Description of Preferred Trust Securities .............................. 23
Description of Preferred Trust Securities Guaranties ................... 24
Description of Junior Subordinated Debt Securities ..................... 26
Relationship among the Preferred Trust Securities, the Junior
Subordinated Debt Securities and the Preferred Trust
Securities Guaranties ................................................ 28
Maryland Anti-Takeover Provisions ...................................... 29
Plan of Distribution ................................................... 30
Legal Matters .......................................................... 31
Experts ................................................................ 31
S-1
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus (including the
information incorporated by reference) contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Forward-looking statements often
can be identified by the words "believe," "expect," "anticipate," "estimate"
or similar expressions. These forward-looking statements relate to our plans,
objectives and future performance and include, without limitation, statements
regarding the anticipated cost savings and other benefits from our asset
rationalization and business process initiatives. These forward-looking
statements are subject to significant risks and uncertainties. Actual results
may differ materially from those contemplated by these forward-looking
statements due to, among others, the risks described in "Risk Factors" and the
following factors:
o our ability to successfully complete our asset rationalization and
business process initiatives, and to realize the anticipated cost savings
and other benefits therefrom;
o heightened competition, including the intensification of price
competition, the entry of new competitors and the expansion of existing
competitors in one or more of our operating regions;
o changes in federal, state or local statutes or regulations affecting the
retail food and food distribution industries, including environmental
compliance;
o the availability and terms of financing, including the possible impact of
changes in the ratings assigned to us by nationally recognized rating
agencies;
o supply of labor, relationships with our employees and the terms of future
collective bargaining agreements;
o supply or quality control problems with our vendors; and
o changes in general business and economic conditions in our operating
regions, including the rate of inflation or deflation and changes in
population and consumer demand and spending.
The forward-looking statements contained in this prospectus supplement and
the accompanying prospectus (including the information incorporated by
reference) are based on our assumptions and beliefs in light of the
information available to us at the time we made these statements. We assume no
obligation or duty to update any of these forward-looking statements except to
the extent required by law.
----------------
In this prospectus supplement, "A&P" refers to The Great Atlantic & Pacific
Tea Company, Inc. on an individual basis and "we," "us" and "our" refer to A&P
and its consolidated subsidiaries, unless otherwise expressly stated or the
context otherwise requires. The term "fiscal 2001" refers to the fiscal year
that will end on February 23, 2002, "fiscal 2000" refers to the fiscal year
ended February 24, 2001, "fiscal 1999" refers to the fiscal year ended
February 26, 2000, "fiscal 1998" refers to the fiscal year ended February 27,
1999, "fiscal 1997" refers to the fiscal year ended February 28, 1998 and
"fiscal 1996" refers to the fiscal year ended February 22, 1997. Each of
fiscal 2000, fiscal 1999, fiscal 1998 and fiscal 1996 was a 52-week year and
fiscal 1997 was a 53-week year. The symbol "$" refers to U.S. dollars, unless
otherwise indicated.
S-2
SUMMARY
The following summary contains basic information about this offering. This
summary may not contain all of the information that is important to you. You
should carefully read this entire prospectus supplement, the accompanying
prospectus, the documents incorporated by reference and the other documents to
which we refer for a more complete understanding of this offering.
The Company
We are one of the 10 largest food retailers in North America and we
currently hold a #1 or #2 position among food retailers in the New York,
Detroit and New Orleans metropolitan areas and in Ontario, Canada, based on
reported sales for fiscal 2000. These core markets currently generate
approximately 80% of our total retail sales. At September 8, 2001, we operated
743 stores and 67 franchised locations throughout the Northeast, Middle
Atlantic, Midwest and Southern regions of the United States as well as
Ontario, Canada. Our company-operated locations comprise 27.8 million square
feet of total space and average approximately 37,500 square feet per store.
For the 52 weeks ended September 8, 2001, we generated sales and adjusted
EBITDA (as defined in note 6 under "--Summary Historical Financial Data") of
$11 billion and $386 million, respectively, with comparable store sales growth
averaging 2.8%.
We operate supermarkets under several well-established banners, including
A&P, Food Emporium, Waldbaum's, Super Fresh, Farmer Jack, Kohl's, Sav-A-
Center, Super Foodmart, Dominion, Food Basics and The Barn Markets. We also
operate several liquor stores under the A&P banner. Our supermarkets sell a
variety of traditional items, including groceries, meats, fresh produce,
delicatessen products, health and beauty aids and general merchandise. In
addition, many stores feature bakery, prepared foods, floral, fresh fish and
cheese departments, a pharmacy and on-site banking. We offer national,
regional and local brands, as well as private label merchandise. One of our
most recognized private label brands is Eight O'Clock Coffee, which is the
leading whole bean coffee retail brand in the United States, accounting for
over 50% of U.S. whole bean retail coffee sales in 2000 by volume.
Within our store base, we operate three differentiated formats: full-
service, high-end supermarkets; traditional supermarkets; and limited
assortment, value-priced stores. Our full-service stores, which operate under
the banners Food Emporium in New York and Dominion in Toronto, Ontario,
compete based on high-end product selection, location and superior customer
service. Traditional store formats, including A&P, Waldbaum's, Farmer Jack,
Kohl's, Super Fresh and Sav-A-Center, offer a full merchandise assortment, as
well as services including pharmacy and banking, and compete on both service
and price. Our limited assortment, value-priced stores, operating primarily in
Canada under the Food Basics banner, compete mostly on price.
Our strategy is to continue capitalizing on our competitive strengths by
implementing focused initiatives designed to increase our market share in our
core markets and enhance the profitability, efficiency and cash flow of our
business. To lead and implement our strategy, we have strengthened management
throughout our organization and have restructured our compensation policies to
incentivize our team to achieve our strategic objectives. Key elements of our
strategy include: improving store level execution; modernizing our store base
in a cost-efficient manner; driving profitable sales through the
implementation of marketing and category management initiatives; increasing
private label sales; and optimizing our procurement and supply chain
management to reduce costs.
We are currently pursuing several initiatives to advance our strategy,
including most significantly our asset rationalization and business process
initiatives. Our asset rationalization initiative was the first step in
directing our resources towards stores, core markets and activities where we
believe we are best positioned to maintain or increase market share and
increase profitability. The initiative included a comprehensive review of the
operating performance of our physical assets, and resulted in selling or
closing store locations, exiting non-core markets and streamlining our
warehouse, distribution and manufacturing facilities. This asset review
concluded in November 2001.
The next step of our strategic implementation has been and continues to be
building the necessary business processes and infrastructure to improve the
efficiency and profitability of our operations. Announced
S-3
on March 13, 2000, our business process initiative is a four-year project from
fiscal 2000 through fiscal 2003 that seeks to create a state of the art supply
chain and business management infrastructure. The initiative targets three
principal operating areas: store operations; supply & logistics; and marketing
& merchandising.
We have achieved favorable results to date from the implementation of our
strategic initiatives. Over the 13 fiscal quarters ended September 8, 2001, we
achieved positive comparable store sales growth in each period, increased
retail sales per square foot from approximately $102 to approximately $118 (on
a quarterly basis) and improved inventory turns from 9.1x to 9.7x. As we
continue to execute our strategy, we expect to achieve further sales growth,
improved margins and increased cash flow in future periods.
We are basing our future growth and the implementation of our strategies on
the following core strengths:
Leading Share in Core Markets. We hold #1 market positions in the New York
and Detroit metropolitan areas and #2 market positions in the New Orleans
metropolitan area and in Ontario, Canada, based on reported sales for fiscal
2000. These core markets currently generate approximately 80% of our total
retail sales and represent a large demographic base upon which to grow our
business.
Valuable Store Locations. The majority of our core markets are in densely
populated metropolitan areas, where we currently control many convenient store
locations under long-term leases. We believe our market positions in such
metropolitan areas are somewhat insulated from competition arising from new
stores due to the scarcity of suitable real estate available to new entrants.
Strong Franchise Value. We operate a portfolio of well-recognized
supermarket banners, including A&P, Food Emporium, Waldbaum's, Super Fresh,
Super Foodmart, Sav-A-Center, Farmer Jack and Kohl's in the United States and
A&P, Dominion and Food Basics in Canada. All of these banners have a long
history in the markets in which they operate and have a broad base of
customers. In addition, Eight O'Clock Coffee, one of our most well-recognized
private label brands, is the leading whole bean retail coffee brand in the
United States, accounting for over 50% of the U.S. whole bean retail market in
2000 by volume. We believe the strength of our banners increases our ability
to retain existing shoppers and attract new customers to our stores.
Strong, Incentivized Management Team. During the past two years, we have
strengthened our management team through the addition of experienced
executives across key functions of our organization including marketing,
category management, supply chain management, information technology, finance,
human resources and store operations. In January 2001, Elizabeth Culligan
joined our management team as our Chief Operating Officer following her
service as President of Nabisco International. Our other new executives also
have substantial experience with leading supermarket and consumer products
companies including Campbell Soup Company, Unilever, Fred Meyer, Inc., H.E.
Butt Grocery Company and Harris Teeter, Inc. These additions complement the
experience and leadership provided over the past several years by Christian
Haub, Chairman, President and Chief Executive Officer, and Fred Corrado, Vice
Chairman and Chief Financial Officer. Our team is incentivized by a
performance-based compensation plan, which includes bonus payments and stock
option grants based on individual and corporate-level operating goals.
Recent Developments
In November 2001, we concluded our previously-disclosed review of
underperforming assets. On November 14, 2001, we announced our intention to
dispose of certain underperforming assets including 39 stores, the majority of
which will be closed before the end of fiscal 2001. Before charges related to
the asset dispositions, estimated at $2.87 per share, we expect earnings for
the third quarter of fiscal 2001 (12 weeks ended December 1, 2001) to be in
the range of $.05 to $.08, at the high end of analysts' estimates reported at
that time in First Call, and we continue to expect earnings of at least break
even for fiscal 2001. On the same basis, we expect sales, EBITDA and adjusted
EBITDA for the third quarter of fiscal 2001 to be approximately $2.53 billion,
$85 million and $107 million, respectively. This compares favorably with
sales, EBITDA and adjusted EBITDA of $2.43 billion, $58 million and $76
million, respectively, for the third quarter of fiscal 2000 (12 weeks ended
December 2, 2000). In addition, we expect total debt to be approximately $920
million as of December 1, 2001, compared to $1.18 billion as of December 2,
2000.
S-4
We expect to incur costs and accrue charges in the range of $115 million to
$125 million after tax, in order to write down fixed assets, close stores,
incur restructuring costs and accrue for future occupancy expenses.
Approximately $100 million of the after-tax costs will be non-cash or paid out
over an extended period of time. We expect to recognize approximately $110
million of these after-tax charges during the third quarter of fiscal 2001,
equivalent to about $2.87 per share. The remainder of the charges will be
recognized in the fourth quarter of fiscal 2001 and the first half of fiscal
2002. In addition to the disposition costs, we will continue to incur non-
accruable operating losses in the underperforming stores until they close. We
indicated in our announcement that we will provide disclosure regarding the
disposition costs and store losses as we report future results.
The asset dispositions will improve our cash position through the reduction
of inventories, elimination of store losses and sale of assets. As most of the
expenses involved are either non-cash or paid out over an extended period of
time, we expect the net cash impact to be positive by approximately $20
million in the first 12 months and remain positive through completion. After
the asset dispositions are concluded in the middle of fiscal 2002, we estimate
the annualized rate of benefit to EBITDA will be approximately $15 million and
the annualized rate of benefit to earnings will be approximately $.35 per
share.
Tender Offer
On November 19, 2001, we commenced a tender offer to purchase any and all of
the $200 million aggregate principal amount of our 7.70% Senior Notes due 2004
(the "2004 Notes"). The tender offer is scheduled to expire at 11:59 p.m., New
York City time, on December 17, 2001, unless extended. The consummation of the
tender offer is conditioned upon, among other things, the consummation of this
offering on terms and conditions satisfactory to us.
We intend to use the net proceeds from this offering to fund the purchase of
the 2004 Notes tendered in the tender offer and, to the extent of funds
remaining following such purchase, to repay outstanding indebtedness under our
secured revolving credit facility and for general corporate purposes,
including working capital. Assuming all of the 2004 Notes are tendered and
purchased, approximately $220.5 million will be required to fund the tender
offer (including estimated expenses and accrued interest). We have retained
Lehman Brothers to serve as the dealer manager for the tender offer and we
will pay Lehman Brothers customary fees for its services as dealer manager.
----------------
Our principal executive offices are located at 2 Paragon Drive, Montvale,
New Jersey 07645, telephone (201) 573-9700.
S-5
The Offering
Issuer. . . . . . . . . . . The Great Atlantic & Pacific Tea Company, Inc.
Securities. . . . . . . . . $275,000,000 aggregate principal amount of 9 1/8%
Senior Notes due 2011.
Maturity Date . . . . . . . December.15, 2011.
Interest Rate . . . . . . . The notes will bear interest at a rate per annum
of 9 1/8% from December 20, 2001.
Interest Payment Dates. . . We will pay interest on the notes in arrears on
each June 15 and December 15, beginning June 15,
2002.
Mandatory Redemption. . . . We will not be required to make mandatory
redemption or sinking fund payments with respect
to the notes.
Optional Redemption . . . . On or after December 15, 2006, we may redeem all
or part of the notes, at the redemption prices
(expressed as percentages of principal amount)
listed below, plus accrued and unpaid interest to
the date of redemption, if redeemed during the 12-
month period commencing on December 15 of the
years set forth below:
Year Redemption Price
---- ----------------
2006 ..................... 104.563%
2007 ..................... 103.042%
2008 ..................... 101.521%
2009 and thereafter ...... 100.000%
Before December 15, 2004, we may redeem up to 35%
of the original aggregate principal amount of the
notes with the net cash proceeds of certain equity
offerings at a redemption price equal to 109.125%
of the principal amount of the notes to be
redeemed, plus accrued and unpaid interest to the
date of redemption; provided that at least 65% of
the original aggregate principal amount of the
notes remains outstanding after the redemption.
Ranking . . . . . . . . . . The notes will be our senior unsecured
obligations. The notes will rank equal in right of
payment with all of our existing and future senior
unsecured debt and senior in right of payment to
any of our future subordinated unsecured debt. The
notes will effectively rank junior to all of our
existing and future secured debt to the extent of
the assets securing such debt. The notes also will
effectively rank junior to all existing and future
obligations of our subsidiaries.
As of September 8, 2001, assuming we had completed
this offering and applied the net proceeds as
described in "Use of Proceeds," we would have had
approximately $166 million of senior secured debt
outstanding (including obligations under capital
leases) and our subsidiaries would have had no
unsecured obligations effectively ranking senior
to the notes. In addition, as of September 8,
2001, on the same basis, A&P would have had
approximately $502 million of senior unsecured
debt outstanding ranking equal to the notes.
Change of Control . . . . . Upon a change of control, as defined in the
indenture governing the notes, you will have the
right to require us to purchase all or
S-6
part of your notes at a price equal to 101% of the
principal amount of the notes to be purchased,
plus accrued and unpaid interest to the date of
purchase. See "Description of the
Notes--Repurchase at the Option of Holders--Change
of Control."
Certain Covenants . . . . . The indenture governing the notes will limit our
and our restricted subsidiaries' ability to, among
other things:
o incur additional indebtedness;
o make restricted payments;
o pay dividends on or redeem our capital stock;
o make certain investments;
o create liens;
o make certain dispositions of assets;
o engage in transactions with affiliates; and
o engage in mergers, consolidations and certain
sales of assets.
The indenture governing the notes also will limit
our ability to permit restrictions on the ability
of our restricted subsidiaries to pay dividends or
make certain other distributions.
These covenants are subject to important
exceptions and qualifications, as described under
"Description of the Notes."
If we achieve an investment grade rating from
Moody's and Standard & Poor's, many of these
covenants will no longer apply.
Use of Proceeds . . . . . . We expect the net proceeds from this offering will
be approximately $268 million. We intend to use
such net proceeds to purchase the 2004 Notes
tendered in the tender offer and, to the extent of
funds remaining following such purchase, to repay
outstanding indebtedness under our secured
revolving credit facility and for general
corporate purposes, including working capital. See
"--Tender Offer" and "Use of Proceeds."
S-7
Summary Historical Financial Data
The following table sets forth our summary consolidated financial data. The
summary statement of operations and balance sheet data as of and for the
fiscal years ended February 27, 1999, February 26, 2000 and February 24, 2001
are derived from our audited consolidated financial statements. The summary
statement of operations and balance sheet data as of and for the 28 weeks
ended September 9, 2000 and September 8, 2001 and the 52 weeks ended September
8, 2001 are derived from our unaudited consolidated financial statements. Our
consolidated balance sheets as of February 26, 2000 and February 24, 2001 and
our statements of consolidated operations and statements of consolidated cash
flows for the fiscal years ended February 27, 1999, February 26, 2000 and
February 24, 2001, and the independent auditors' report thereon, are included
elsewhere in this prospectus supplement and incorporated by reference in the
accompanying prospectus. The summary consolidated financial data should be
read in conjunction with, and are qualified in their entirety by reference to,
our consolidated financial statements and the related notes.
Fiscal Year Ended Fiscal Period Ended
------------------------------------------- --------------------------- 52 Weeks
February 27, February 26, February 24, September 9, September 8, Ended
1999 2000 2001 2000 2001 September 8,
(52 weeks) (52 weeks) (52 weeks) (28 weeks) (28 weeks) 2001
------------ ------------ ------------ ------------ ------------ ------------
(dollars in thousands)
Statement of Operations Data:
Sales ................................ $10,179,358 $10,151,334 $10,622,866 $5,639,354 $5,935,884 $10,919,396
Gross margin ......................... 2,919,248 2,907,616 3,028,416 1,623,598 1,699,519 3,104,337
Income (loss) from operations (1) .... (164,391) 104,830 50,193 50,222 30,167 30,138
Interest expense ..................... 71,497 84,045 96,088 51,068 48,944 93,964
Net (loss) income .................... (67,164) 14,160 (25,068) 210 (10,370) (35,648)
Balance Sheet Data (end of period):
Cash and short-term investments ...... $ 136,810 $ 124,603 $ 131,550 $ 96,394 $ 159,686 $ 159,686
Total assets ......................... 3,160,814 3,335,525 3,309,803 3,363,026 3,206,518 3,206,518
Total debt (2) ....................... 860,692 997,254 1,039,947 1,074,247 915,943 915,943
Net total debt (3) ................... 723,882 872,651 908,397 977,853 756,257 756,257
Stockholders' equity ................. 837,257 846,192 797,297 838,704 786,653 786,653
Other Data:
EBITDA (4) ........................... $ 70,276 $ 338,488 $ 304,506 $ 186,642 $ 174,081 $ 291,945
EBITDAR (5) .......................... 267,966 536,426 527,396 302,647 310,370 535,119
Adjusted EBITDA (6) .................. 370,302 441,381 379,707 220,730 226,767 385,744
Adjusted EBITDAR (7) ................. 567,992 639,319 602,597 336,735 363,056 628,918
Capital expenditures ................. 438,345 479,572 415,842 241,643 123,481 297,680
Depreciation and amortization ........ 233,663 232,712 255,771 135,451 143,256 263,576
Ratio of earnings to fixed charges
(8)................................. -- 1.18x 0.77x 1.03x 0.84x 0.68x
As Adjusted for Store Closures (9):
Sales ................................ $10,603,361
EBITDA (4) ........................... 306,838
EBITDAR (5) .......................... 531,473
Adjusted EBITDA (6) .................. 400,637
Adjusted EBITDAR (7) ................. 625,272
Ratio of adjusted EBITDA to interest
expense............................. 4.26x
Ratio of net total debt to adjusted
EBITDA.............................. 1.89x
S-8
Fiscal Year Ended Fiscal Period Ended
------------------------------------------- --------------------------- 52 Weeks
February 27, February 26, February 24, September 9, September 8, Ended
1999 2000 2001 2000 2001 September 8,
(52 weeks) (52 weeks) (52 weeks) (28 weeks) (28 weeks) 2001
------------ ------------ ------------ ------------ ------------ ------------
(dollars in thousands)
Operating Data:
Stores in operation (10):
Beginning of period ................. 936 839 750 750 752 750
Opened or acquired .................. 46 54 47 25 8 30
Closed or sold ...................... 143 143 45 25 17 37
End of period ....................... 839 750 752 750 743 743
Total store area (square feet)
(10)(11)............................ 28,736,319 26,904,331 27,931,729 27,322,365 27,844,743 27,844,743
Number of franchised stores (11) ..... 55 65 68 67 67 67
Total franchised store area
(square feet) (11).................. 1,537,388 1,908,271 2,021,206 2,037,593 1,991,735 1,991,735
Comparable store sales growth (10) ... 1.9% 4.4% 2.2% 2.2% 3.3% 2.8%
Average weekly sales per store (12) .. $ 211 $ 246 $ 263 $ 260 $ 274 $ 271
- ---------------
(1) Fiscal year ended February 27, 1999 includes pre-tax charges of $300
million related to our asset rationalization initiative announced in
fiscal 1998. Fiscal year ended February 26, 2000 includes $103 million.
Asset rationalization costs include operating losses and other costs
related to stores and facilities identified for closure. Fiscal year
ended February 24, 2001 includes pre-tax charges of $75 million related
to our business process initiative. The 28 weeks ended September 9, 2000
includes $34 million. The 28 weeks ended September 8, 2001 includes $54
million.
(2) Total debt includes short-term and long-term debt and current and non-
current obligations under capital leases.
(3) Net total debt is calculated as total debt minus cash and short-term
investments.
(4) EBITDA represents income from operations before income taxes, interest
expense, depreciation, amortization and non-cash LIFO adjustments. EBITDA
is a widely accepted financial indicator of a company's ability to
service and/or incur debt. However, EBITDA should not be construed as an
alternative to operating income (as determined in accordance with
generally accepted accounting principles) or to cash flows from operating
activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of
our operating performance or as a measure of liquidity.
(5) EBITDAR represents EBITDA (as defined in note (4)) plus rent expense.
(6) Adjusted EBITDA for the fiscal year ended February 27, 1999 excludes from
EBITDA pre-tax charges relating to our asset rationalization initiative
totaling $300 million, including operating losses and other costs related
to stores and facilities identified for closure. Adjusted EBITDA for the
fiscal year ended February 26, 2000 excludes from EBITDA pre-tax charges
of $103 million, including operating losses and other costs related to
stores and facilities identified for closure. Adjusted EBITDA for the
fiscal year ended February 24, 2001 excludes from EBITDA pre-tax charges
of $75 million related to our business process initiative, approximately
25% of which is attributable to employee salary and benefits. Adjusted
EBITDA for the 28 weeks ended September 9, 2000 excludes from EBITDA pre-
tax charges of $34 million. Adjusted EBITDA for the 28 weeks ended
September 8, 2001 excludes from EBITDA pre-tax charges of $53 million.
Such items have been adjusted out as they are considered non-recurring.
(7) Adjusted EBITDAR represents Adjusted EBITDA (as explained in note (6))
plus rent expense.
(8) In calculating the ratio of earnings to fixed charges, earnings consist
of income (loss) before income taxes and extraordinary items plus fixed
charges. Fixed charges consist of interest expense plus the portion of
rental expense under leases that has been deemed by us to be
representative of the interest factor. The deficiency in earnings
available to cover fixed charges for the fiscal year ended February 27,
1999 was $229 million.
(9) As adjusted for store closures data exclude operating results of the
39 stores planned for closure as if such stores had been closed at the
beginning of the 52-week period. See "--Recent Developments." Such data
do not give effect to the offering of the notes and the application of
the net proceeds therefrom.
(10) Includes company-operated stores but excludes franchised stores.
(11) Amounts presented are as of period end.
(12) Includes company-operated stores but excludes franchised stores, free-
standing liquor stores and Food Emporium stores.
S-9
RISK FACTORS
You should consider carefully the risk factors described below, together
with the other information included or incorporated by reference in this
prospectus supplement and the accompanying prospectus, before you decide to
purchase any notes.
Risks Related to Our Business
We may not achieve the expected cost savings and other benefits of our asset
rationalization and business process initiatives. We have incurred and will
continue to incur related costs that may adversely affect our results of
operations.
While our asset rationalization and business process initiatives are
designed to reduce expenses and improve performance following their
completion, our cost savings estimates and other expected benefits are based
on many assumptions, including future sales levels and other operating
results, the timing of events, general industry and business conditions and
other factors. Many of these factors are beyond our control. Our actual cost
savings and other benefits, if any, could differ from our estimates and
expectations and these differences could be material. We also may experience
delays in the realization of any cost savings or other benefits. In
particular, our business process initiative requires significant cash
expenditures and there may be unforeseen costs or other factors that will
offset our expected cost savings. In connection with our business process
initiative, we are working with technology suppliers IBM, Oracle and Retek
Inc., a Minneapolis-based provider of information technology solutions to the
retail sector, to develop and implement a proprietary supply chain and
category management system. We cannot assure you that we will be able to
successfully develop or implement a workable system in a timely manner or at a
cost that is acceptable to us. Moreover, even if we are able to do so, the
system may not achieve its intended goals. As a result of these and other
factors, we cannot assure you that our initiatives will achieve the estimated
cost savings or other expected benefits within the anticipated time frames or
at all.
We have incurred and will continue to incur costs in connection with these
initiatives. In fiscal 1998 and fiscal 1999, we incurred pre-tax charges
related to our asset rationalization initiative of $87 million and $103
million, respectively. In connection with the asset dispositions announced in
November 2001, we expect to incur after-tax charges in the range of $115
million to $125 million in order to write down fixed assets, close stores,
incur restructuring costs and accrue for future occupancy expenses.
Approximately $100 million of the after-tax costs will be non-cash or paid out
over an extended period of time. We expect to recognize approximately $110
million of these after-tax charges during the third quarter of fiscal 2001.
The remainder of the charges will be recognized in the fourth quarter of
fiscal 2001 and the first half of fiscal 2002. In fiscal 2000, we incurred
pre-tax charges related to our business process initiative of $75 million. We
expect to incur pre-tax charges related to this initiative of approximately
$99 million in fiscal 2001. We expect the pre-tax charges as a result of this
initiative to be comparable in fiscal 2002 and lower in fiscal 2003. The costs
include primarily professional consulting fees and salaries, including related
benefits of employees working full time on the initiative. The actual amount
of charges cannot be known until these initiatives are completed and may be
greater than currently expected.
Our indebtedness could adversely affect our financial condition by reducing
our operating flexibility and increasing our borrowing costs.
As of September 8, 2001, assuming we had completed this offering and applied
the net proceeds as described in "Use of Proceeds," our total indebtedness
would have been approximately $943 million, or 55% of our total
capitalization. We also would have had approximately $330 million of
availability under our secured revolving credit facility as of that date after
reducing availability for outstanding letters of credit and inventory
requirements.
Our indebtedness could have important consequences to holders of the notes,
including the following:
o our ability to obtain additional financing in the future for capital
expenditures, acquisitions or general corporate purposes, including
working capital, may be impaired;
S-10
o a substantial portion of our cash flows from operations may be dedicated
to the payment of principal and interest on our indebtedness, thereby
reducing the funds available to us for our operations;
o the documents governing our indebtedness contain financial and other
restrictive covenants;
o a portion of our borrowings are and will continue to be at variable rates
of interest, which exposes us to the risk of higher interest rates; and
o we may be at a competitive disadvantage compared to our competitors with
less indebtedness and more vulnerable to changing economic conditions.
Our needs for cash in the future will depend on many factors that are
difficult to predict, including our results of operations and efforts to
complete our asset rationalization and business process initiatives. We
believe that our current cash resources, including the funds available under
our secured revolving credit facility, together with cash generated from
operations, will be sufficient for these initiatives and other capital
expenditure programs and mandatory scheduled debt repayments throughout the
next 12 months. However, we cannot assure you that our business will generate
sufficient cash flow from operations or that future borrowings will be
available under our secured revolving credit facility in an amount sufficient
to enable us to service our indebtedness, including the notes, or to fund our
other liquidity needs in fiscal 2001 or beyond. Accordingly, we may be
required to refinance all or a portion of our existing debt, incur additional
indebtedness, forgo strategic opportunities, reduce or delay capital
expenditures, sell assets, seek additional equity capital or delay, scale back
or eliminate our business process initiative or other aspects of our
operations.
Moreover, to the extent we seek to refinance our current indebtedness,
replacement financing may not be available on terms that are favorable or
acceptable to us or at all. In addition, we may not be able to obtain
acceptable financing upon the expiration of our secured revolving credit
facility in December 2003. For further descriptions of our secured revolving
credit facility and our other indebtedness, see "Description of Certain
Indebtedness." Our ability to obtain additional or replacement financing may
be significantly impacted by, among other things, any negative change in the
ratings assigned to us by nationally recognized ratings agencies. Any of these
events, if they were to occur, could have a material adverse effect on our
business, financial condition, results of operations or cash flows.
The retail food industry is highly competitive.
The retail merchandising business in general, and the supermarket industry
in particular, is highly and increasingly competitive. We compete directly
with national, regional and local supermarket chains, as well as independent
supermarkets, limited assortment stores, discount stores, convenience stores
and the newer "alternative format" food stores, including warehouse club
stores and deep discount "supercenters." We also face competition from
restaurants and fast food chains, which compete for expenditures on food. Some
of our competitors may have greater financial resources and lower merchandise
acquisition costs than we do.
Retail businesses generally compete on the basis of location, price, quality
of products and service, convenience, product variety and store condition. The
number and type of competitors vary by location, and our competitive position
varies according to the individual markets in which we operate. Our ability to
compete depends, in part, on our ability to offer competitive prices, products
and service and to maintain and remodel existing stores in order to provide
our customers with a pleasant shopping experience. Given the low margin nature
of the supermarket business, our profitability could be significantly impacted
to the extent we are required to engage in significant price competition with
our principal competitors, which could intensify due to, among other things,
consolidation in the industry. Our ability to compete also may be materially
adversely affected by the amount of our indebtedness and the limitations
imposed by restrictive and negative covenants imposed by our indebtedness.
Our secured revolving credit facility contains, and the indenture governing
the notes will contain, provisions that could materially restrict our ability
to operate our business.
Our secured revolving credit facility contains, and the indenture governing
the notes will contain, a number of significant covenants that, among other
things, restrict our ability to:
o incur additional indebtedness;
S-11
o make restricted payments;
o pay dividends on or redeem capital stock;
o make certain investments;
o create liens;
o make certain dispositions of assets;
o engage in transactions with affiliates; and
o engage in mergers, consolidations and certain sales of assets.
These covenants also limit our ability to permit restrictions on the ability
of our restricted subsidiaries to pay dividends or make certain other
distributions. In addition, we are required to meet a number of financial
ratios and tests under our secured revolving credit facility.
Our ability to comply with these covenants may be affected by events beyond
our control. If we breach any of these covenants or restrictions, it could
result in an event of default under our secured revolving credit facility,
which, if not cured or waived, would permit our lenders to declare all amounts
borrowed thereunder to be due and payable, together with accrued and unpaid
interest, and our lenders could terminate their commitments to make further
extensions of credit under our secured revolving credit facility. If we were
unable to repay debt to our lenders, they could proceed against the collateral
securing the debt.
Our business could be adversely affected by increasing labor costs and costs
associated with labor unions.
As of September 8, 2001, we had approximately 83,000 employees, of which
approximately 69% were employed on a part-time basis. Over the last few years,
a tight labor market, increased overtime and a higher full-time employee ratio
have caused our labor costs to increase. If the tight labor market were to
continue, a shortage of qualified employees may require us to continue to
enhance our wage and benefits package in order to compete effectively in the
hiring and retention of qualified employees or to hire more temporary
employees. We cannot assure you that our labor costs will not continue to
increase, or that such increases can be recovered through increased prices
charged to customers. Any significant failure to attract and retain qualified
employees, to control our labor costs or to recover any increased labor costs
through increased prices charged to customers could have a material adverse
effect on our results of operations.
In addition, approximately 89% of our employees are covered by union
contracts. We cannot assure you that more of our employees will not be covered
by union contracts in the future or that any of our stores will not experience
a work stoppage or other labor disruption. Any prolonged labor disruption
involving our employees could have a material adverse effect on our business,
financial condition, results of operations or cash flows.
Because we own and operate real estate, we face the risk of being held liable
for environmental damages that may occur on our properties.
Our facilities and operations are subject to various laws, regulations and
judicial and administrative orders concerning protection of the environment
and human health, including those governing discharges into the air and water,
waste management, remediation of contaminated soil and groundwater, and
workplace health and safety. The Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), and similar state laws,
impose strict, and under certain circumstances joint and several, liability on
the current or prior owner or operator of property for costs of investigating
and remediating on-site contamination, or contamination at off-site disposal
locations. We have been designated as a potentially responsible party by the
United States Environmental Protection Agency under CERCLA at two pending
disposal sites but expect to resolve our liability on a de minimis basis at
each of them. We are also conducting soil and groundwater clean-ups at a
former facility in Milwaukee, Wisconsin and at an owned site in Tenafly, New
Jersey. We have established reserves which we expect to be adequate to satisfy
anticipated costs of known remediation requirements; however, we cannot assure
you that these and other available measures will be sufficient to cover all
costs related to these matters.
We believe we are currently in substantial compliance with applicable
environmental and worker health and safety requirements. However, we cannot
assure you that future developments such as more aggressive
S-12
enforcement policies, new laws or discovery of unknown conditions will not
require expenditures which could have a material adverse effect on our financial
condition, results of operations or cash flows.
We may not be able to use our net operating loss carryforwards to reduce our
income tax obligations.
As of September 8, 2001, we had net operating loss carryforwards of
approximately Cdn$70 million from our Canadian operations and approximately
$209 million from our U.S. operations. These amounts may increase as a result
of our planned asset dispositions. See "Summary--Recent Developments." The
Canadian portion of our net operating loss carryforwards will expire between
February 2002 and February 2003 and the U.S. portion will expire between
February 2019 and February 2022. We have assessed our ability to utilize our
net operating loss carryforwards and concluded that no valuation allowance
currently is required since we believe that it is more likely than not that
the net operating loss carryforwards will be utilized either by generating
taxable income or through tax planning strategies. However, this cannot be
assured. Accordingly, some portions of these net operating loss carryforwards
may expire before we can utilize them to reduce our income tax obligations.
Our income tax obligations affect our cash position and, therefore, may affect
our ability to make payments on our long-term debt, including the notes.
We may be adversely affected by fluctuating utility and fuel costs.
Fluctuating fuel costs may adversely affect our operating costs in that we
incur the cost of fuel in connection with the transportation of goods from our
warehouse and distribution facilities to our stores. In addition, operations
at our stores are sensitive to rising utility fuel costs due to the amount of
electricity and gas required to operate our stores. We may not be able to
recover these rising utility and fuel costs through increased prices charged
to our customers.
Risks Related to the Notes
Because our secured revolving credit facility is secured by substantially all
of our assets, it is possible that in the event of insolvency or liquidation
there would be insufficient assets remaining to satisfy the claims of the
holders of the notes.
We are party to a $425 million secured revolving credit facility that is
secured by a first priority lien on a substantial portion of our assets and
the assets of our subsidiaries, including our inventory and certain owned real
estate. The notes, however, will not be secured by any of our assets.
Therefore, if we become insolvent or are liquidated, or if payment under the
secured revolving credit facility is accelerated, the lenders under such
facility would be entitled to exercise the remedies available to a secured
lender under applicable law and pursuant to the instruments governing such
indebtedness. Accordingly, such lenders will have a prior claim on our assets
securing their indebtedness. Because the notes will not be secured by any of
our assets, it is possible that there would be no assets remaining from which
claims of the holders of the notes could be satisfied or, if any such assets
remained, that such assets might be insufficient to satisfy such claims in
full. As of September 8, 2001, assuming we had completed this offering and
applied the net proceeds as described in "Use of Proceeds," we would have had
approximately $52 million of senior secured debt outstanding under our secured
revolving credit facility and the availability to borrow up to $330 million of
additional senior secured debt thereunder after reducing availability for
outstanding letters of credit and inventory requirements.
Our company structure may affect your investment and our ability to service
our indebtedness.
A significant portion of our assets (but less than a majority) are located
at A&P. Accordingly, we will rely on dividends and advances and transfers of
funds from our subsidiaries to generate the funds necessary to meet our
ongoing debt service obligations, including payment of our obligations under
the notes. Our subsidiaries' ability to pay such dividends and make such
advances and transfers will be subject to, among other things, applicable law
and contractual restrictions imposed by the agreements governing our
indebtedness and other agreements to which we or our subsidiaries may be
subject. We cannot assure you that our subsidiaries at any given time will be
able to make distributions to us.
S-13
The notes are effectively subordinated to the obligations of our subsidiaries,
and your right to receive payments on the notes could be adversely affected if
any of our subsidiaries declare bankruptcy, liquidate or reorganize.
In the event any of our subsidiaries become insolvent, liquidate,
reorganize, dissolve or otherwise wind up, holders of their indebtedness and
their trade creditors generally will be entitled to payment on their claims
from the assets of those subsidiaries before any of those assets are made
available to us. Consequently, your claims in respect of the notes will be
effectively subordinated to all of the obligations of our subsidiaries. As of
September 8, 2001, assuming we had completed this offering and applied the net
proceeds as described in "Use of Proceeds," we would have had approximately
$114 million of senior secured debt outstanding, excluding indebtedness under
our secured revolving credit facility, the majority of which were obligations
under capital leases of our subsidiaries. In addition, as of such date, our
subsidiaries had no unsecured obligations.
Our majority shareholder may support strategies that are opposed to the
interests of our noteholders or with which you disagree.
As of September 8, 2001, Tengelmann Warenhandelsgesellschaft, a German
partnership controlled by Erivan Haub, owned beneficially and of record
approximately 57% of our common stock on a fully diluted basis. As a result of
this equity ownership, Tengelmann has the power to significantly influence the
results of shareholder votes and the election of our board of directors, as
well as transactions involving a potential change of control of A&P.
Tengelmann may support strategies and directions for A&P which are in its best
interests or in the interests of our equity holders but which are opposed to
the interests of our noteholders or with which you disagree. We cannot assure
you that Tengelmann will not increase its ownership percentage in the future.
We may not have the ability to raise the funds necessary to finance the change
of control offer required by the indenture governing the notes.
Upon the occurrence of a change of control of A&P, we will be required to
offer to purchase all outstanding notes and other outstanding debt. If a
change of control were to occur, we cannot assure you that we would have
sufficient funds to pay the purchase price for all the notes tendered by the
holders. Our secured revolving credit facility contains, and any future
agreements relating to indebtedness to which we become a party may contain,
provisions restricting our ability to purchase notes or providing that an
occurrence of a change of control constitutes an event of default, or
otherwise requiring payment of amounts borrowed under those agreements. If a
change of control occurs at a time when we are prohibited from purchasing the
notes, we could seek the consent of our then existing lenders and other
creditors to the purchase of the notes or could attempt to refinance the
indebtedness that contains the prohibition. If we do not obtain such a consent
or repay such indebtedness, we would remain prohibited from purchasing the
notes. In that case, our failure to purchase tendered notes would constitute
an event of default under the indenture governing the notes and may constitute
a default under the terms of other indebtedness that we may enter into from
time to time.
For more details, see "Description of the Notes--Repurchase at the Option of
Holders--Change of Control."
The notes have no established trading market or history.
The notes will constitute a new class of securities with no established
trading market. Although the underwriters have indicated that they intend to
make a market in the notes, they are not obligated to do so and any such
market-making activities may be terminated or limited at any time. In
addition, we do not intend to apply for a listing of the notes on any
securities exchange or interdealer quotation system. As a result, there can be
no assurance as to the liquidity of markets that may develop for the notes,
the ability of the holders of the notes to sell their notes or the price at
which such holders would be able to sell their notes. The notes may trade at
prices that are lower than their initial market values depending on many
factors, including prevailing interest rates and the markets for similar
securities. The liquidity of trading markets for the notes may also be
adversely affected by general declines or disruptions in the market for non-
investment grade debt. Such market declines or disruptions could adversely
affect the liquidity of and market for the notes independent of our financial
performance or prospects.
S-14
USE OF PROCEEDS
We expect the net proceeds from this offering, after deducting estimated
underwriting discounts and commissions and the estimated expenses of the
offering, will be approximately $268 million. We intend to use the net
proceeds from this offering to purchase the 2004 Notes tendered in the tender
offer and, to the extent of funds remaining following such purchase, to repay
outstanding indebtedness under our secured revolving credit facility and for
general corporate purposes, including working capital. The 2004 Notes bear
interest at the per annum rate of 7.70% and mature on January 15, 2004. As of
September 8, 2001, borrowings under our secured revolving credit facility had
a weighted average interest rate of 6.20%. Our secured revolving credit
facility expires on December 31, 2003.
CAPITALIZATION
The following table sets forth our cash and short-term investments and our
consolidated capitalization as of September 8, 2001 on an actual basis and as
adjusted to give effect to this offering and the anticipated application of
the estimated net proceeds from this offering (including accrued interest on
the 2004 Notes to the purchase date). You should read this table in
conjunction with our consolidated financial statements and the related notes
included elsewhere in this prospectus supplement or incorporated by reference
in the accompanying prospectus. See "Use of Proceeds," "Selected Historical
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Description of Certain Indebtedness."
September 8, 2001
------------------------
Actual As Adjusted
---------- -----------
(dollars in thousands,
except share data)
Cash and short-term investments ........................................... $ 159,686 $ 159,686
========== ==========
Debt (including current portion):
Secured revolving credit facility (1).................................... $ 99,519 $ 52,019
7.70% senior notes due 2004 (2).......................................... 200,000 --
7.75% notes due 2007..................................................... 300,000 300,000
Less unamortized discount on 7.75% notes due 2007........................ (1,621) (1,621)
9 1/8% senior notes due 2011 offered hereby.............................. -- 275,000
9.375% senior quarterly interest bonds due 2039.......................... 200,000 200,000
Other debt and obligations under capital leases.......................... 118,045 118,045
---------- ----------
Total debt ............................................................ 915,943 943,443
---------- ----------
Stockholders' equity:
Preferred stock--no par value; authorized 3,000,000 shares;
issued--none ........................................................... -- --
Common stock--$1 par value; authorized 80,000,000 shares;
issued and outstanding--38,347,216 shares .............................. 38,347 38,347
Additional paid in capital............................................... 456,470 456,470
Accumulated other comprehensive loss..................................... (73,082) (73,082)
Retained earnings........................................................ 364,918 356,618
---------- ----------
Total stockholders' equity ............................................ 786,653 778,353
---------- ----------
Total capitalization..................................................... $1,702,596 $1,721,796
========== ==========
- ---------------
(1) As of September 8, 2001, assuming we had completed this offering and
applied the net proceeds as described in "Use of Proceeds," we would have
had approximately $330 million of availability under our secured revolving
credit facility after reducing availability for outstanding letters of
credit and inventory requirements. See "Description of Certain
Indebtedness--Secured Revolving Credit Facility."
(2) Assumes all of the 2004 Notes are tendered and purchased in the tender
offer. See "Summary--Tender Offer."
S-15
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth our selected consolidated financial data. The
selected statement of operations and balance sheet data as of and for the
fiscal years ended February 22, 1997, February 28, 1998, February 27, 1999,
February 26, 2000 and February 24, 2001 are derived from our audited
consolidated financial statements. The selected statement of operations and
balance sheet data as of and for the 28 weeks ended September 9, 2000 and
September 8, 2001 and the 52 weeks ended September 8, 2001 are derived from
our unaudited consolidated financial statements. Our consolidated balance
sheets as of February 26, 2000 and February 24, 2001 and our statements of
consolidated operations and statements of consolidated cash flows for the
fiscal years ended February 27, 1999, February 26, 2000 and February 24, 2001,
and the independent auditors' report thereon, are included elsewhere in this
prospectus supplement and incorporated by reference in the accompanying
prospectus. The selected consolidated financial data should be read in
conjunction with, and are qualified in their entirety by reference to, our
consolidated financial statements and the related notes.
Fiscal
Fiscal Year Ended Period Ended
-------------------------------------------------------------------------- ------------
February 22, February 28, February 27, February 26, February 24, September 9,
1997 1998 1999 2000 2001 2000
(52 weeks) (53 weeks) (52 weeks) (52 weeks) (52 weeks) (28 weeks)
------------ ------------ ------------ ------------ ------------ ------------
(dollars in thousands)
Statement of Operations
Data:
Sales.................... $10,089,014 $10,262,243 $10,179,358 $10,151,334 $10,622,866 $5,639,354
Gross margin............. 2,921,699 2,934,878 2,919,248 2,907,616 3,028,416 1,623,598
Income (loss) from
operations (1)......... 169,303 155,259 (164,391) 104,830 50,193 50,222
Interest expense......... 73,208 80,152 71,497 84,045 96,088 51,068
Net (loss) income........ 73,032 63,042 (67,164) 14,160 (25,068) 210
Balance Sheet Data (end
of period):
Cash and short-term
investments............ $ 98,830 $ 70,937 $ 136,810 $ 124,603 $ 131,550 $ 96,394
Total assets............. 3,002,672 2,995,253 3,160,814 3,335,525 3,309,803 3,363,026
Total debt (2)........... 870,493 845,389 860,692 997,254 1,039,947 1,074,247
Net total debt (3)....... 771,663 774,452 723,882 872,651 908,397 977,853
Stockholders' equity..... 890,072 926,632 837,257 846,192 797,297 838,704
Other Data:
EBITDA (4)............... $ 400,051 $ 389,495 $ 70,276 $ 338,488 $ 304,506 $ 186,642
EBITDAR (5).............. 568,186 575,665 267,966 536,426 527,396 302,647
Adjusted EBITDA (6)...... 400,051 389,495 370,302 441,381 379,707 220,730
Adjusted EBITDAR (7)..... 568,186 575,665 567,992 639,319 602,597 336,735
Capital expenditures..... 296,878 267,623 438,345 479,572 415,842 241,643
Depreciation and
amortization........... 230,748 234,236 233,663 232,712 255,771 135,451
Net cash provided by
operating activities... 216,069 276,227 487,086 314,660 253,761 118,133
Net cash used in
investing activities... (277,470) (235,840) (425,799) (378,253) (265,587) (225,105)
Net cash provided by
(used in) financing
activities............. 60,292 (67,261) 6,863 49,589 20,968 79,638
Ratio of earnings to
fixed charges (8)...... 1.77x 1.58x -- 1.18x 0.77x 1.03x
As Adjusted for Store
Closures (9):
Sales....................
EBITDA (4)...............
EBITDAR (5)..............
Adjusted EBITDA (6)......
Adjusted EBITDAR (7).....
Ratio of adjusted EBITDA
to interest expense....
Ratio of net total debt
to adjusted EBITDA.....
Fiscal
Period Ended
------------ 52 Weeks
September 8, Ended
2001 September 8,
(28 weeks) 2001
------------ ------------
(dollars in thousands)
Statement of Operations
Data:
Sales.................... $5,935,884 $10,919,396
Gross margin............. 1,699,519 3,104,337
Income (loss) from
operations (1)......... 30,167 30,138
Interest expense......... 48,944 93,964
Net (loss) income........ (10,370) (35,648)
Balance Sheet Data (end
of period):
Cash and short-term
investments............ $ 159,686 $ 159,686
Total assets............. 3,206,518 3,206,518
Total debt (2)........... 915,943 915,943
Net total debt (3)....... 756,257 756,257
Stockholders' equity..... 786,653 786,653
Other Data:
EBITDA (4)............... $ 174,081 $ 291,945
EBITDAR (5).............. 310,370 535,119
Adjusted EBITDA (6)...... 226,767 385,744
Adjusted EBITDAR (7)..... 363,056 628,918
Capital expenditures..... 123,481 297,680
Depreciation and
amortization........... 143,256 263,576
Net cash provided by
operating activities... 164,262 299,890
Net cash used in
investing activities... (49,518) (90,000)
Net cash provided by
(used in) financing
activities............. (85,999) (144,669)
Ratio of earnings to
fixed charges (8)...... 0.84x 0.68x
As Adjusted for Store
Closures (9):
Sales.................... $10,603,361
EBITDA (4)............... 306,838
EBITDAR (5).............. 531,473
Adjusted EBITDA (6)...... 400,637
Adjusted EBITDAR (7)..... 625,272
Ratio of adjusted EBITDA
to interest expense.... 4.26x
Ratio of net total debt
to adjusted EBITDA..... 1.89x
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Fiscal Year Ended
--------------------------------------------------------------------------
February 22, February 28, February 27, February 26, February 24,
1997 1998 1999 2000 2001
(52 weeks) (53 weeks) (52 weeks) (52 weeks) (52 weeks)
------------ ------------ ------------ ------------ ------------
(dollars in thousands)
Operating Data:
Stores in operation (10):
Beginning of period ..................... 1,014 973 936 839 750
Opened or acquired ...................... 30 40 46 54 47
Closed or sold .......................... 71 77 143 143 45
End of period ........................... 973 936 839 750 752
Total store area (square feet)
(10)(11)................................ 30,587,324 30,574,286 28,736,319 26,904,331 27,931,729
Number of franchised stores (11) ......... 49 52 55 65 68
Total franchised store area
(square feet) (11)...................... 1,345,786 1,389,435 1,537,388 1,908,271 2,021,206
Comparable store sales
growth (10)............................. (0.5%) (1.6%) 1.9% 4.4% 2.2%
Average weekly sales
per store (12).......................... $ 195 $ 199 $ 211 $ 246 $ 263
Fiscal Period Ended
--------------------------- 52 Weeks
September 9, September 8, Ended
2000 2001 September 8,
(28 weeks) (28 weeks) 2001
------------ ------------ ------------
(dollars in thousands)
Operating Data:
Stores in operation (10):
Beginning of period ..................... 750 752 750
Opened or acquired ...................... 25 8 30
Closed or sold .......................... 25 17 37
End of period ........................... 750 743 743
Total store area (square feet)
(10)(11)................................ 27,322,365 27,844,743 27,844,743
Number of franchised stores (11) ......... 67 67 67
Total franchised store area
(square feet) (11)...................... 2,037,593 1,991,735 1,991,735
Comparable store sales
growth (10)............................. 2.2% 3.3% 2.8%
Average weekly sales
per store (12).......................... $ 260 $ 274 $ 271
- ---------------
(1) Fiscal year ended February 27, 1999 includes pre-tax charges of $300
million related to our asset rationalization initiative announced in
fiscal 1998. Fiscal year ended February 26, 2000 includes $103 million.
Asset rationalization costs include operating losses and other costs
related to stores and facilities identified for closure. Fiscal year ended
February 24, 2001 includes pre-tax charges of $75 million related to our
business process initiative. The 28 weeks ended September 9, 2000
includes $34 million. The 28 weeks ended September 8, 2001 includes
$54 million.
(2) Total debt includes short-term and long-term debt and current and non-
current obligations under capital leases.
(3) Net total debt is calculated as total debt minus cash and short-term
investments.
(4) EBITDA represents income from operations before income taxes, interest
expense, depreciation, amortization and non-cash LIFO adjustments. EBITDA
is a widely accepted financial indicator of a company's ability to service
and/or incur debt. However, EBITDA should not be construed as an
alternative to operating income (as determined in accordance with
generally accepted accounting principles) or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of our operating
performance or as a measure of liquidity.
(5) EBITDAR represents EBITDA (as defined in note (4)) plus rent expense.
(6) Adjusted EBITDA for the fiscal year ended February 27, 1999 excludes from
EBITDA pre-tax charges relating to our asset rationalization initiative
totaling $300 million, including operating losses and other costs related
to stores and facilities identified for closure. Adjusted EBITDA for the
fiscal year ended February 26, 2000 excludes from EBITDA pre-tax charges
of $103 million, including operating losses and other costs related to
stores and facilities identified for closure. Adjusted EBITDA for the
fiscal year ended February 24, 2001 excludes from EBITDA pre-tax charges
of $75 million related to our business process initiative, approximately
25% of which is attributable to employee salary and benefits. Adjusted
EBITDA for the 28 weeks ended September 9, 2000 excludes from EBITDA pre-
tax charges of $34 million. Adjusted EBITDA for the 28 weeks ended
September 8, 2001 excludes from EBITDA pre-tax charges of $53 million.
Such items have been adjusted out as they are considered non-recurring.
(7) Adjusted EBITDAR represents Adjusted EBITDA (as explained in note (6))
plus rent expense.
(8) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) before income taxes and extraordinary items plus fixed
charges. Fixed charges consist of interest expense plus the portion of
rental expense under leases that has been deemed by us to be
representative of the interest factor. The deficiency in earnings
available to cover fixed charges for the fiscal year ended February 27,
1999 was $229 million.
(9) As adjusted for store closures data exclude operating results of the
39 stores planned for closure as if such stores had been closed at the
beginning of the 52-week period. See "Summary--Recent Developments." Such
data do not give effect to the offering of the notes and the application
of the net proceeds therefrom.
(10) Includes company-operated stores but excludes franchised stores.
(11) Amounts presented are as of period end.
(12) Includes company-operated stores but excludes franchised stores, free-
standing liquor stores and Food Emporium stores.
S-17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our results of operations and current
financial condition. This discussion should be read in conjunction with the
consolidated financial statements included elsewhere in this prospectus
supplement and incorporated by reference in the accompanying prospectus. This
discussion of our results of operations and financial condition includes
various forward-looking statements. These statements are based on certain
assumptions that we consider reasonable. For information about these
assumptions and other risks and exposures relating to us and our business, we
refer you to "Risk Factors" and "Forward-Looking Statements."
Results of Operations
Twenty-eight Weeks Ended September 8, 2001 Compared to 28 Weeks Ended
September 9, 2000
Sales for the 28 weeks ended September 8, 2001 of $5,936 million increased
$297 million or 5.3% from sales of $5,639 million for the 28 weeks ended
September 9, 2000. The increase in sales is due to increases in retail sales
of $269 million and wholesale sales of $28 million. The increase in retail
sales is attributable to the opening of 47 new stores in fiscal 2000 and 8 new
stores in fiscal 2001, increasing sales by $294 million. Additionally,
comparable store sales for the second quarter of fiscal 2001, which include
replacement stores, increased $168 million or 3.3% when compared to the second
quarter of fiscal 2000. This increase was partially offset by the closure of
49 stores in fiscal 2000 and 18 stores in fiscal 2001, which decreased sales
$150 million, and the unfavorable effect of the Canadian exchange rate, which
decreased sales $43 million. The increase in wholesale sales is attributable
to higher sales volume of $44 million partially offset by the unfavorable
effect of the Canadian exchange rate, which decreased sales by $16 million.
Average weekly sales per supermarket were approximately $273,800 for the 28
weeks ended September 8, 2001 versus $259,700 for the corresponding period of
the prior year, an increase of 5.4%. Sales in the U.S. during the 28 weeks
ended September 8, 2001 increased by $222.2 million or 5.1% compared to fiscal
2000. Sales in Canada during the 28 weeks ended September 8, 2001 increased
$74.3 million or 5.9% compared to fiscal 2000.
Gross margin as a percentage of sales decreased 16 basis points to 28.63%
for the 28 weeks ended September 8, 2001 from 28.79% for the 28 weeks ended
September 9, 2000. The gross margin dollar increase of $75.9 million resulted
from an increase in sales volume partially offset by decreases in the gross
margin rate and the Canadian exchange rate.
Store operating, general and administrative expense ("SG&A") was $1,669.4
million for the 28 weeks ended September 8, 2001 compared to $1,573.4 million
for the corresponding period of the prior year. As a percentage of sales, SG&A
increased from 27.90% for the 28 weeks ended September 9, 2000 to 28.12% for
the 28 weeks ended September 8, 2001.
Included in cost of merchandise sold and SG&A are costs relating to our
business process initiative of $5.6 million and $48.9 million for the 28 weeks
ended September 8, 2001, respectively, and $0 and $34.1 million for the 28
weeks ended September 9, 2000, respectively. The costs included in cost of
merchandise sold for the 28 weeks ended September 8, 2001, which lowered gross
margin as a percentage of sales by 10 basis points, were incurred to mark down
inventory to be discontinued as a result of detailed category management
studies. The costs included in SG&A for both periods primarily included
professional consulting fees and salaries, including related benefits, of
employees working full-time on the initiatives. Also included in the first
half of fiscal 2000 SG&A were $3.0 million of estimated environmental cleanup
costs for a non-retail property. Partially offsetting the fiscal 2000 expense
was a reversal of $3.1 million of pre-tax charges related to the asset
rationalization 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 was 27.30% for both the 28 weeks ended
September 9, 2000 and the 28 weeks ended September 8, 2001.
Interest expense of $48.9 million for the 28 weeks ended September 8, 2001
decreased from the prior year amount of $51.0 million. This was due to decreased
borrowing requirements during fiscal 2001 as a
S-18
result of lower capital expenditures, a reduction in working capital and the
proceeds received on the sale leaseback transaction described in note 8 of our
unaudited consolidated financial statements. The reduction is also partially due
to a decrease in interest rates.
The loss before income taxes for the 28 weeks ended September 8, 2001 was
$15.0 million compared to income before income taxes of $2.4 million for the
comparable period in the prior year, a decrease of $17.4 million. The loss is
attributable principally to the increase in SG&A and the lower gross margin
rate partially offset by lower interest expense.
The benefit from income taxes for the 28 weeks ended September 8, 2001 was
$4.7 million compared to a provision for income taxes of $2.2 million in the
comparable period of fiscal 2000. This benefit from income taxes for the 28
weeks ended September 8, 2001 reflects the estimated expected annual tax rates
applied to our 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 first
half of 2001 was decreased by $1.2 million to reflect the reduction in value
of the deferred Canadian tax asset (primarily relating to net operating loss
carryforwards) resulting from the lower rates. Excluding this adjustment of
the tax asset, the benefit from income taxes would have been $5.9 million or
39.0% of the loss before income taxes.
During the 28 weeks ended September 8, 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 an impact on
the financial statements for the 28 weeks ended September 8, 2001.
Based on these overall results, the net loss for the 28 weeks ended
September 8, 2001 was $10.4 million or $0.27 per share -- basic and diluted,
as compared to net income of $0.2 million or $0.01 per share -- basic and
diluted for the 28 weeks ended September 9, 2000. The decrease in net income
of $10.6 million from the first half of fiscal 2000 to the first half of
fiscal 2001 is attributable principally to the lower gross margin rate, the
increase in SG&A and the change in the Canadian corporate income tax rate,
partially offset by lower interest expense.
Fiscal 2000 Compared to Fiscal 1999
Sales for the 52 weeks ended February 24, 2001 of $10.6 billion increased
$471.5 million or 4.6% from the 52-week period of fiscal 1999. The increase in
sales is primarily attributable to continued focus on the development of
larger stores and comparable store sales increases. Retail square footage
increased by approximately 1.0 million or 3.8% to 27.9 million square feet
during fiscal 2000. This increase was accomplished primarily by opening 47 new
stores, adding 2.2 million retail square feet, partially offset by closing 49
stores, reducing retail square footage by 1.4 million. Comparable store sales,
which include replacement stores, increased 2.2% in fiscal 2000 (1.6% in the
United States and 4.9% in Canada).
Average weekly sales per supermarket were approximately $263,000 for fiscal
2000 versus $245,700 for fiscal 1999, an increase of 7.0%. Sales in the United
States increased by $266.1 million or 3.3% compared to fiscal 1999. Sales in
Canada increased $205.4 million or 9.5% from fiscal 1999.
Gross margin as a percentage of sales decreased 13 basis points to 28.51%
for fiscal 2000 from 28.64% for fiscal 1999. The gross margin dollar increase
of $120.8 million resulted from an increase in sales volume partially offset
by decreases in the gross margin rate and the Canadian exchange rate. The U.S.
operations gross margin increase of $92.5 million resulted from increases of
$80.4 million due to higher sales volume and $12.1 million due to a higher
gross margin rate. The Canadian operations gross margin increase of $28.3
million resulted from an increase of $54.1 million due to higher sales volume
partially offset by a decrease of $18.9 million due to a lower gross margin
rate and a decrease of $6.9 million from fluctuations in the Canadian exchange
rate.
SG&A was $3.0 billion for fiscal 2000 compared to $2.8 billion for fiscal
1999. As a percentage of sales, SG&A increased from 27.61% in fiscal 1999 to
28.04% in fiscal 2000.
S-19
The SG&A expense for fiscal 2000 included $68.4 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. Also included in fiscal 2000 SG&A was $4.3
million of estimated environmental cleanup costs for a non-retail property.
Partially offsetting fiscal 2000 SG&A was a reversal of $3.1 million of pre-
tax charges related to our asset rationalization 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.
The SG&A expense for fiscal 1999 included $121.5 million relating to our
asset rationalization initiative, including $74.6 million of costs related to
the store exiting charges and $68.8 million of store operating, general and
administrative expense incurred by the stores identified for closure prior to
ceasing operations. This was partially offset by reversals of previously
recorded pre-tax restructuring charges due to favorable progress in marketing
and subleasing the closed stores of $21.9 million.
Excluding the non-recurring charges and the results of the stores identified
for closure previously noted, as a percentage of sales, SG&A increased from
26.83% for fiscal 1999 to 27.38% for fiscal 2000. The increase of 55 basis
points is primarily due to higher labor, occupancy and store closing costs in
fiscal 2000.
Interest expense for fiscal 2000 increased $12.0 million or 14.3% from
fiscal 1999 due to the increase in average borrowings, as well as an increase
in interest rates primarily associated with the 9.375% Senior Quarterly
Interest Bonds issued in August 1999.
The loss before income taxes for fiscal 2000 was $39.7 million compared to
income before income taxes of $27.0 million for fiscal 1999, a decrease of
$66.7 million. The loss is attributable principally to the increases in SG&A
and interest expense partially offset by higher gross margin.
The income tax benefit/provision recorded in fiscal 2000 and 1999 reflect
the estimated expected annual tax rates applied to our respective domestic and
foreign financial results. In fiscal 2000, an income tax benefit amounting to
$14.6 million was recorded as compared to an income tax provision of $12.8
million for fiscal 1999. The effective tax rates for fiscal 2000 and fiscal
1999 were 36.8% and 47.6%, respectively.
Based on these overall results, the net loss for fiscal 2000 was $25.1
million or $0.65 per share -- basic and diluted, as compared to net income of
$14.2 million or $0.37 per share -- basic and diluted for fiscal 1999. The
decrease in net income of $39.2 million from fiscal 1999 to fiscal 2000 is
attributable principally to the increases in SG&A and interest expense
partially offset by higher gross margin.
Fiscal 1999 Compared to Fiscal 1998
Sales for the 52 weeks ended February 26, 2000 of $10.2 billion decreased
$28.0 million or 0.3% from the 52-week period of fiscal 1998. The decrease in
sales is primarily attributable to the closure of 249 stores, excluding
replacement stores, since the beginning of fiscal 1998 including 165 stores
relating to our asset rationalization initiative. Retail square footage
decreased by approximately 1.8 million or 6.4% to 26.9 million square feet
during fiscal 1999. This decrease was caused primarily by the closure of 142
stores, reducing retail square footage by 4.4 million square feet, partially
offset by the addition of 52 new stores which increased retail square footage
by 2.5 million. Comparable store sales, which include replacement stores,
increased 4.4% in fiscal 1999 (4.1% in the United States and 6.2% in Canada).
Average weekly sales per supermarket were approximately $245,700 in fiscal
1999 versus $210,500 in fiscal 1998, reflecting a 16.7% increase. Sales in the
United States decreased by $295.3 million or 3.6% compared to fiscal 1998.
Sales in Canada increased $267.3 million or 14.0% from fiscal 1998.
Gross margin as a percentage of sales decreased 4 basis points to 28.64% for
fiscal 1999 from 28.68% for fiscal 1998. Margins were negatively impacted by
accelerated inventory markdowns in stores that were identified for closure under
our asset rationalization initiative and the exit of the Atlanta market during
the first quarter of fiscal 1999. The gross margin dollar decrease of $11.6
million resulted predominantly from lower sales volume. The U.S. operations
gross margin decrease of $56.2 million resulted from lower sales volume, which
impacted gross margin by $88.1 million, partially offset by an increase of $31.9
million from a higher gross margin rate. The Canadian operations gross margin
increase of $44.6 million resulted from
S-20
higher sales volume, which impacted gross margin by $56.7 million, and an
increase of $6.4 million from fluctuations in the Canadian exchange rate. The
increase was partially offset by a decrease of $18.5 million due to a lower
gross margin rate.
The SG&A expense for fiscal 1999 decreased $280.9 million from fiscal 1998.
As a percentage of sales, SG&A for fiscal 1999 decreased to 27.61% from 30.29%
for fiscal 1998. Fiscal 1998 SG&A includes pre-tax charges of $224.6 million
recorded in the third and fourth quarters to establish reserves relating to
our asset rationalization initiative. Also included in SG&A for fiscal 1998
are shut-down costs of stores and facilities amounting to $9.1 million
relating to 66 stores and three facilities closed in the third and fourth
quarters and $5.9 million of incurred professional fees associated with the
identification and implementation of our asset rationalization initiative.
Further, SG&A for fiscal 1998 includes a $7.0 million write-down of property
no longer held for a potential store site and a $4.0 million pre-tax
litigation charge.
Fiscal 1999 SG&A includes additional costs related to our asset
rationalization initiative totaling $74.6 million, including severance of
$11.1 million which could not be accrued in fiscal 1998 because it did not
meet the criteria under Emerging Issues Task Force ("EITF") 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
Activity (Including Certain Costs Incurred in a Restructuring)," professional
fees of $16.2 million associated with the implementation of the initiative,
transitionally higher labor costs of $14.0 million, costs of $19.7 million for
the conversion of additional stores to the Food Basics format and $8.5 million
of other miscellaneous operating costs incurred in connection with the
initiative. The $74.6 million also includes the costs of exiting the Atlanta
market consisting of severance of $5.5 million and store occupancy cost of
$11.5 million which relates principally to the present value of future lease
obligations, partially offset by a gain of $11.9 million that resulted from
the disposition of fixed and intangible assets.
The total fiscal 1999 charge of $74.6 million is partially offset by a $21.9
million reversal of pre-tax charges related to our asset rationalization
initiative originally recorded in fiscal 1998.
Excluding the non-recurring charges under our asset rationalization
initiative discussed above, fiscal 1999 SG&A decreased $82.6 million from
fiscal 1998. As a percentage of sales, SG&A decreased from 27.83% to 27.09%.
Fiscal 1999 results included higher SG&A of the stores identified for closure
under this initiative of $68.8 million, which represented 43.4% of the sales
of those stores. Excluding the results of stores identified for closure and
the non-recurring charges under this initiative, fiscal 1999 SG&A as a
percentage of sales was 26.83%.
Interest expense increased $12.5 million from the previous year, primarily
due to the additional present value interest related to the future lease
obligations of the store exit programs as well as the issuance of $200 million
of 9.375% Senior Quarterly Interest Bonds in August 1999.
Interest income decreased $0.4 million from the previous year, primarily due
to a lower amount of short-term investments.
For fiscal 1999, income before income taxes was $27.0 million compared to a
loss of $229.3 million in fiscal 1998, an increase of $256.3 million. Income
before taxes for U.S. operations was virtually break even compared to a loss
of approximately $244 million in fiscal 1998. The Canadian income before taxes
for fiscal 1999 amounts to $27.1 million, which was an increase of $12.3
million from the fiscal 1998 amount of approximately $14.8 million.
We recorded an income tax provision amounting to $12.8 million in fiscal
1999 as compared to an income tax benefit of $162.1 million for fiscal 1998.
The fiscal 1999 income tax provision of $12.8 million reflects our estimated
annual tax rates applied to our respective domestic and foreign operations.
The effective tax rate for fiscal 1999 was 47.6%. The fiscal 1998 benefit of
$162.1 million includes the reversal of the Canadian operations' deferred tax
valuation allowance. During the first three quarters of fiscal 1998, we
reversed approximately $9 million of the Canadian valuation allowance to the
extent that the Canadian operations had taxable income. At the beginning of
the fourth quarter of fiscal 1998, based upon management's plan to close
underperforming stores in Canada, the implementation of certain tax strategies
and the continued performance improvements of the Canadian operations,
management concluded that it was more likely than not that the net deferred
tax assets related to the Canadian operations would be realized.
S-21
Accordingly, we reversed the remaining portion of the Canadian deferred tax
valuation allowance amounting to approximately $60 million (see note 8 to our
audited consolidated financial statements for the fiscal year ended February
24, 2001 for further discussion). The deferred tax benefit recorded during
fiscal 1998 for U.S. operations of approximately $103 million relates
primarily to book and tax differences of the store and facilities exit costs.
Based on these overall results, net income for fiscal 1999 was $14.1 million
or $0.37 per share -- basic and diluted, as compared to a net loss of $67.2
million or $1.75 per share -- basic and diluted for fiscal 1998. The increase
in net income of $81.3 million in fiscal 1999 from a net loss of $67.2 million
in fiscal 1998 is primarily the result of improved same store sales, reduced
operating costs and the decrease in the store and facilities exit costs. The
increase is partially offset by a reduction in the number of open stores.
Asset Rationalization Initiative
In May 1998, we named a sole Chief Executive Officer. Following the
appointment, we initiated a vigorous assessment of all aspects of our business
operations in order to identify the factors that were impacting our
performance.
As a result of the above assessment, in the third quarter of fiscal 1998, we
decided to exit two warehouse facilities and a coffee plant in the United
States, and bakery plant in Canada. In connection with the exit plan, we
recorded a charge of approximately $11 million which is included in SG&A in
our statements of consolidated operations for fiscal 1998. The $11 million
charge was comprised of $7 million of severance, $3 million of facilities
occupancy costs for the period subsequent to closure and $1 million to write-
down the facilities to their estimated face value.
As of February 27, 1999, we had closed and terminated operations with
respect to the two warehouses and the coffee plant. The volume associated with
the warehouses was transferred to other warehouses in close geographic
proximity. Further, the manufacturing processes of the coffee plant have been
transferred to our remaining coffee processing facility. The processing
associated with Canadian bakery was outsourced in January 1999.
In addition, in December 1998, our board of directors approved a plan which
included the exit of 127 underperforming stores throughout the United States
and Canada and the disposal of two other properties. Included in the 127
stores were 31 stores representing the entire Richmond, Virginia market.
Further, in January 1999, our board of directors approved the closure of five
additional underperforming stores. In connection with our plan to exit these
132 stores and the write-down of two properties, we recorded a charge in the
fourth quarter of fiscal 1998 of approximately $215 million.
This $215 million charge consisted of $8 million of severance (including
pension withdrawal obligations), $1 million of facilities occupancy costs,
$114 million of store occupancy costs, which principally relates to the
present value of future lease obligations, net of anticipated sublease
recoveries, which extend through fiscal 2028, an $83 million write-down of
store fixed assets and a $9 million write-down to estimated fair value of two
properties. To the extent fixed assets included in stores identified for
closure could be utilized in other continuing stores, we transferred those
assets to continuing stores. We planned to scrap fixed assets that could not
be transferred and, accordingly, the write-down was calculated based upon an
estimated scrap value. This charge of $215 million was reduced by
approximately $2 million in fiscal 1998 due to changes in estimates of pension
withdrawal liabilities and fixed asset write-downs from the time the original
charge was recorded. The net charge of $213 million is included in SG&A in our
statements of consolidated operations for fiscal 1998.
In addition to the charges recorded in fiscal 1998, there were other charges
related to the exit plan which could not be accrued for at February 27, 1999
because they did not meet the criteria for accrual under EITF 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
Activity (Including Certain Costs Incurred in a Restructuring)." Such costs
have been expensed as incurred as the exit plan was being executed. During
fiscal 1999, we recorded an additional pre-tax charge of $11 million for
severance related to the 132 stores. No additional expense was recorded during
fiscal 2000.
S-22
In April 1999, we announced that we had reached definitive agreements to
sell 14 stores in the Atlanta, Georgia market, two of which were previously
included in our asset rationalization initiative. In conjunction with the
sale, we decided to exit the entire Atlanta market and close the remaining 22
stores, as well as the distribution center and administrative office.
Accordingly, at the time of the announcement, we recorded a fiscal 1999 first
quarter net pre-tax charge of approximately $5 million. This charge was
comprised of severance of $6 million and future lease commitments of $11
million, partially offset by a $12 million gain related to the disposition of
fixed and intangible assets. The net charge is included in SG&A in our
statements of consolidated operations for fiscal 1999.
From the time of the original charges through the end of fiscal 2000, $28
million of the total severance charges had been paid, and an additional
$0.5 million was paid during the 28 weeks ended September 8, 2001, resulting
from the termination of approximately 3,400 employees. The remaining severance
liability relates to future obligations for early withdrawals from multi-
employer union pension plans.
The following reconciliation summarizes the activity related to the
aforementioned charges since the beginning of fiscal 1998:
Severance
Store Fixed and Facilities
Occupancy Assets Benefits Occupancy Total
--------- -------- --------- ---------- --------
(dollars in thousands)
Original Charge...................................................... $113,732 $ 93,355 $ 15,102 $ 4,018 $226,207
Addition (1)......................................................... 1,900 -- -- -- 1,900
Utilization.......................................................... (1,100) (92,639) (3,794) (311) (97,844)
Adjustment(2)........................................................ -- (716) (1,242) 331 (1,627)
-------- -------- -------- ------- --------
Reserve Balance at February 27, 1999................................. 114,532 -- 10,066 4,038 128,636
Addition (1)......................................................... 15,730 -- 17,060 3,188 35,978
Utilization.......................................................... (4,614)(3) (295) (19,626) (3,659) (28,194)
Adjustment (2)....................................................... (22,195) 295 -- -- (21,900)
-------- -------- -------- ------- --------
Reserve Balance at February 26, 2000................................. $103,453 -- $ 7,500 $ 3,567 $114,520
Addition (1)......................................................... 5,062 -- -- -- 5,062
Utilization.......................................................... (25,654) -- (4,779) (463) (30,896)
Adjustment (2)....................................................... -- -- -- (3,104) (3,104)
-------- -------- -------- ------- --------
Reserve Balance at February 24, 2001................................. 82,861 -- 2,721 -- 85,582
Addition (1)......................................................... 2,331 -- -- -- 2,331
Utilization.......................................................... (11,909) -- (320) -- (12,229)
-------- -------- -------- ------- --------
Reserve Balance at September 8, 2001................................. $ 73,283 $ -- $ 2,401 $ -- $ 75,684
======== ======== ======== ======= ========
- ---------------
(1) The additions to store occupancy of $1.9 million, $5.1 million and $2.3
million during fiscal 1998, fiscal 2000 and the 28 weeks ended September 8,
2001, respectively, represent the present value of accrued interest related
to lease obligations. The fiscal 1999 addition represents an increase to
the store occupancy reserve for the present value of accrued interest of
$7.4 million, additional severance cost of $11.5 million and the cost of
exiting the Atlanta market (including store occupancy of $8.3 million,
severance of $5.6 million and facilities costs of $3.2 million).
(2) At each balance sheet date, we assess the adequacy of the reserve balance to
determine if any adjustments are required as a result of changes in
circumstances or estimates. As a result, in fiscal 1998, we recorded an
adjustment to severance and benefits related to a change in the estimate of
the calculated pension withdrawal liability. In the third quarter of fiscal
1999, we recorded a net reduction in SG&A of $21.9 million to reverse a
portion of the $224 million restructuring charge recorded in fiscal 1998.
This amount represents a $22.2 million reduction in SG&A for lower store
occupancy costs resulting primarily
S-23
from earlier than anticipated lease terminations and subleases. The credit
is partially offset by $0.3 million of additional fixed asset write-downs
resulting from lower than anticipated proceeds from the sale of fixed
assets. In fiscal 2000, we recorded a net reduction in SG&A of $3.1 million
to reverse a portion of the $224 million restructuring charge recorded in
fiscal 1998. The reversal is primarily a result of a change in estimate
resulting from the sale of one of our warehouses during the first quarter of
fiscal 2000.
(3) Store occupancy utilization for fiscal 1999 is comprised of $29.6 million
of lease and other occupancy payments for the period, net of $25.0 million
of net proceeds on the assignment of leases which was considered in
determining the original charge recorded during fiscal 1998.
Based upon available information, we evaluated the reserve balances of
$85.6 million and $75.7 million as of February 24, 2001 and September 8, 2001,
respectively, and concluded that they are adequate. We 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 September 8,
2001, approximately $12.3 million of the reserve is included in "Other
accruals" and the remaining amount is included in "Other non-current
liabilities" in our consolidated balance sheets.
Included in our statements of consolidated operations for the 12 and 28
weeks ended September 8, 2001 and September 9, 2000 are the operating results
of the one remaining store that was identified for closure as part of this
initiative. This store was closed during the second quarter of fiscal 2001.
The operating results of this store are as follows:
12 Weeks Ended 28 Weeks Ended
--------------------------- ---------------------------
September 8, September 9, September 8, September 9,
2001 2000 2001 2000
------------ ------------ ------------ ------------
(dollars in thousands)
Sales .......................... $ 16 $163 $ 197 $377
==== ==== ===== ====
Operating Loss ................. $(62) $ (4) $(108) $(71)
==== ==== ===== ====
As of September 8, 2001, we had closed 166 stores, including 34 stores in
the Atlanta, Georgia market and 31 stores in the Richmond, Virginia market,
and the other facilities associated with this initiative.
In November 2001, we concluded our previously-disclosed review of
underperforming assets. On November 14, 2001, we announced our intention to
dispose of certain underperforming assets including 39 stores, the majority of
which will be closed before the end of fiscal 2001. See "Summary--Recent
Developments."
Business Process Initiative
On March 13, 2000 we announced an initiative to develop a state-of-the-art
supply chain and business management infrastructure. In fiscal 2000, we
incurred pre-tax charges related to our business process initiative of
$75 million. Costs related to implementing our business process initiative
reduced net earnings for fiscal 2000 by $1.15 per share. We expect the cost of
implementing our business process initiative to reduce net earnings for fiscal
2001 by approximately $1.50 per share. During the 28 weeks ended September 8,
2001, we incurred expenses related to our business process initiative of
approximately $54 million before tax benefits. For the remainder of fiscal
2001, we plan to incur approximately $45 million in additional expenses,
before tax benefits, related to our business process initiative.
Liquidity and Capital Resources
We had working capital of $37.7 million at September 8, 2001 compared to
$94.4 million at fiscal 2000 year end. We had cash and short-term investments
aggregating $159.7 million at September 8, 2001 compared to $131.6 million as of
fiscal 2000 year end, including $26.9 million in short-term investments at
September 8, 2001 compared to no short-term investments at February 24, 2001.
The decrease in working capital is attributable primarily to increases in book
overdrafts and other accruals, as well as a decrease in inventories. This is
partially offset by increases in short-term investments, as well as a decrease
in accounts payable. Working capital of $94.4 million at February 24, 2001
included approximately $28 million of assets
S-24
held for sale within "Prepaid expenses and other current assets" on our
consolidated balance sheets relating to assets to be sold and leased back in
early fiscal 2001.
On August 6, 1999, we issued $200 million aggregate principal amount 9.375%
Senior Quarterly Interest Bonds due August 1, 2039. We used the net proceeds
from the issuance of these bonds to repay borrowings under our revolving
credit facility, to finance the purchase of 16 stores, (6 in the United States
and 10 in Canada) and for working capital and general corporate purposes.
At February 24, 2001, we had an unsecured five-year $498 million revolving
credit agreement which was to expire June 10, 2002 with a syndicate of banks,
enabling us to borrow funds on a revolving basis sufficient to refinance
short-term borrowings. This agreement was subsequently replaced by our
existing secured revolving credit agreement described below. As of February
24, 2001, the unsecured credit agreement was comprised of the U.S. credit
agreement amounting to $415 million and the Canadian credit agreement
amounting to $83 million (Cdn$121 million at February 24, 2001). As of
February 24, 2001, we had $190 million of borrowings under the unsecured
credit agreement consisting of $145 million under the U.S. credit agreement
and $45 million (Cdn$69 million at February 24, 2001) under the Canadian
credit agreement. This compared to borrowings of $60 million under the U.S.
credit agreement and no borrowings under the Canadian credit agreement at
February 26, 2000.
On February 23, 2001, we entered into a $425 million secured revolving
credit facility expiring December 31, 2003, 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. Our secured
revolving credit facility is secured primarily by inventory and company-owned
real estate. It is comprised of a U.S. portion amounting to $340 million and a
Canadian portion amounting to $85 million (Cdn$133 million at September 8,
2001). As of September 8, 2001, we had $100 million of borrowings under the
facility. Accordingly, as of September 8, 2001, after reducing availability
for outstanding letters of credit and inventory requirements, we had $282
million available under the facility. Borrowings under the facility bear
interest at the weighted average rate of 6.20% as of September 8, 2001 based
on the variable LIBOR pricing. We intend to use a portion of the net proceeds
of the offering of the notes to repay borrowings under the facility.
Our loan agreements and certain of our notes contain various financial
covenants which require, among other things, minimum fixed charge coverage and
maximum levels of leverage and capital expenditures. At September 8, 2001, we
were in compliance with the covenants on the notes and our secured revolving
credit facility.
As described in note 7 of our consolidated financial statements, during
fiscal 2000, we entered into an agreement which provided financing for
software purchases and hardware leases up to $71 million in the aggregate
primarily relating to our business process initiative. 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 related
to software purchases of approximately $29 million were to be repaid over the
next several months. Accordingly, as of September 8, 2001, approximately $25
million had been repaid and $4 million was payable related to software.
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
September 8, 2001, approximately $27 million had been funded related to
hardware leases and, as a result, approximately $15 million was available for
future financing.
As described in note 8 of our consolidated financial statements, during the
fourth quarter of fiscal 2000, we sold 12 properties and simultaneously leased
them back from the purchaser. Net proceeds received by us related to this
transaction amounted to approximately $113 million. Additionally, during the
first half of fiscal 2001, we sold seven properties and simultaneously leased
them back from the purchaser. Net proceeds received by us related to these
transactions amounted to approximately $50 million. During the remainder of
fiscal 2001, we expect to enter into similar transactions with two other owned
properties with expected gross proceeds of approximately $15 million.
S-25
During the 28 weeks ended September 8, 2001, we funded our capital
expenditures, debt repayments and expenses related to our business process
initiative through internally generated funds combined with proceeds from
disposals of property and revolving lines of credit. Capital expenditures
totaled $123 million during the 28 weeks ended September 8, 2001, which
included eight new supermarkets, ten major remodels or enlargements, and the
capital expenditures related to our business process initiative. Capital
expenditures are expected to be approximately $135 million for the remainder
of fiscal 2001, which includes approximately 12 new supermarkets, as well as
capital expenditures related to our business process initiative.
On December 5, 2000, our board of directors discontinued payment of the
quarterly cash dividend on its common stock. A&P does not expect to pay
dividends during fiscal 2001.
We believe that our current cash resources, including the funds available
under our secured revolving credit facility, together with cash generated from
operations, will be sufficient for our business process initiative expenses,
other capital expenditure programs and mandatory scheduled debt repayments
throughout the next 12 months.
Market Risk
Market risk represents the risk of loss from adverse market changes that may
impact our 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.
Interest Rates
Our exposure to market risk for changes in interest rates relates primarily
to our debt obligations. We have no cash flow exposure due to rate changes on
our $700 million in notes as of September 8, 2001 because they are at fixed
interest rates. However, we do have cash flow exposure on our committed and
uncommitted bank lines of credit due to its variable LIBOR pricing.
Accordingly, as of September 8, 2001, a 1% change in LIBOR will result in
interest expense fluctuating approximately $1.0 million per year.
Foreign Exchange Risk
We are exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. For the 12 and 28 weeks ended September
8, 2001, a change in the Canadian currency of 10% would have resulted in a
fluctuation in net income of approximately $0.7 million and $1 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.
S-26
BUSINESS
Overview
We are one of the 10 largest food retailers in North America and we
currently hold a #1 or #2 position among food retailers in the New York,
Detroit and New Orleans metropolitan areas and in Ontario, Canada, based on
reported sales for fiscal 2000. These core markets currently generate
approximately 80% of our total retail sales. At September 8, 2001, we operated
743 stores and 67 franchised locations throughout the Northeast, Middle
Atlantic, Midwest and Southern regions of the United States as well as
Ontario, Canada. Our company-operated locations comprise 27.8 million square
feet of total space and average approximately 37,500 square feet per store.
For the 52 weeks ended September 8, 2001, we generated sales and adjusted
EBITDA of $11 billion and $386 million, respectively, with comparable store
sales growth averaging 2.8%.
We operate supermarkets under several well-established banners, including
A&P, Food Emporium, Waldbaum's, Super Fresh, Farmer Jack, Kohl's, Sav-A-
Center, Super Foodmart, Dominion, Food Basics and The Barn Markets. We also
operate several liquor stores under the A&P banner. Our supermarkets sell a
variety of traditional items, including groceries, meats, fresh produce,
delicatessen products, health and beauty aids and general merchandise. In
addition, many stores feature bakery, prepared foods, floral, fresh fish and
cheese departments, a pharmacy and on-site banking. We offer national,
regional and local brands, as well as private label merchandise. One of our
most recognized private label brands is Eight O'Clock Coffee, which is the
leading whole bean retail coffee brand in the United States, accounting for
over 50% of U.S. whole bean retail coffee sales in 2000 by volume.
Strategy for Building the New A&P
Our strategy is to continue capitalizing on our competitive strengths by
implementing focused initiatives designed to increase our market share in our
core markets and enhance the profitability, efficiency and cash flow of our
business. To lead and implement our strategy, we have strengthened management
throughout our organization and have restructured our compensation policies to
incentivize our team to achieve our strategic objectives. Key elements of our
strategy are set forth below:
Improving Store Level Execution. We are extending best practices across our
store base to improve store level execution. Outstanding execution in our
stores is a critical element in attracting and retaining a loyal customer base
and achieving strong comparable store sales growth. The initiatives we are
pursuing in this area include: improving in-stock positions; executing
promotions consistently; improving the appearance of our stores; offering
excellent customer service; and instituting labor scheduling designed to meet
customer needs. To encourage implementation of these initiatives, we have
extended our stock-based compensation plan to the store manager level and have
based this plan on the achievement of store operating goals.
Modernizing Our Store Base in a Capital-Efficient Manner. We are remodeling
and modernizing our store base in order to enhance our customers' shopping
experiences and to profitably grow market share in our core regions. Our
remodeling program aims to upgrade or enlarge 75 existing stores per year.
Approximately 40% of our store base has been built or upgraded over the past 5
years, and we expect approximately 75% to be remodeled by 2004. In addition,
we plan to open approximately 20 to 30 new stores each year. We recently
instituted a rigorous capital allocation review process which carefully
analyzes each capital project to ensure that the project is consistent with
our strategy and can achieve a minimum of 20% return on capital.
Driving Profitable Sales. We intend to grow our sales and profitability
through increased focus on marketing and use of customer data, category
management and private label initiatives. Our marketing initiatives are
designed to clearly define the positioning of each of our banners and increase
the use of customer data to drive sales. We derive customer data from our
loyalty programs. A substantial portion of our total sales for fiscal 2000
were related to purchases under our loyalty programs. Through improved
category management, we are analyzing sales and margin by product for the
purpose of optimizing our mix of categories, brands and SKUs to achieve higher
profit per square foot and increase customer satisfaction. Finally, we intend
to strengthen the positioning of our corporate brands in order to grow our
private label sales, which typically generate a higher gross margin than
national-brands merchandise.
S-27
Optimizing Our Procurement and Supply Chain Management. We are committed to
reducing costs across the organization. Our primary goals are to improve the
efficiency of our supply chain, establish more cost-efficient purchasing and
distribution activities, increase labor productivity and reduce inventory
levels at our distribution centers and stores. In particular, we believe a
more efficient supply chain will enable us to partner more effectively with
our vendors. We are also examining all non-merchandise purchasing practices
for savings opportunities and continue to stringently control administrative
expenses.
Strategy Implementation
We are currently pursuing several initiatives to advance our strategy,
including most significantly our asset rationalization and business process
initiatives.
Asset Rationalization Initiative
The first step in executing our strategy was the rationalization of our
asset base. We conducted a comprehensive review of the operating performance
of our physical assets, including a detailed analysis of our entire store
base, our warehouse and distribution facilities and the manufacturing
facilities associated with our corporate brands. We concluded this review in
November 2001. From the inception of this initiative in late 1998 through
December 1, 2001, we executed the following:
o Sold, closed or approved the closing of 205 stores in the United States
and Canada, including exiting the Richmond, Virginia and Atlanta, Georgia
markets;
o Closed two warehouse facilities and a coffee plant in the United States
and consolidated such operations with other company-operated facilities;
and
o Closed a bakery plant in Canada and outsourced the production volume to a
third party.
The aim of this initiative is to direct resources towards stores, core
markets and activities where we believe we are best positioned to maintain or
increase market share and to increase profitability.
Business Process Initiative
The next step of our strategic implementation has been and continues to be
building the necessary businesses processes and infrastructure to improve the
efficiency and profitability of our operations. Announced on March 13, 2000,
our business process initiative seeks to create a state of the art supply
chain and business management infrastructure by targeting three principal
operational areas: store operations; supply & logistics; and marketing &
merchandising. A&P has partnered with IBM, Oracle and Retek to develop and
implement new business processes and the underlying technology infrastructure.
This initiative is a four-year project from fiscal 2000 through fiscal 2003
that is forecasted to be fully repaid by the end of fiscal 2003.
We have achieved favorable results to date from the implementation of our
strategic initiatives. Over the 13 fiscal quarters ended September 8, 2001, we
achieved positive comparable store sales growth in each period, increased
sales per square foot from approximately $102 to approximately $118 (on a
quarterly basis) and improved inventory turns from 9.1x to 9.7x. As we
continue to execute our strategy, we expect to achieve further sales growth,
improved margins and increased cash flow in future periods.
Our Competitive Strengths
We are basing our future growth and the implementation of our strategies on
the following core strengths:
Leading Share in Core Markets. We hold #1 market positions in the New York
and Detroit metropolitan areas and #2 market positions in the New Orleans
metropolitan area and in Ontario, Canada, based on reported sales for fiscal
2000. These core markets currently generate approximately 80% of our total
retail sales and represent a large demographic base upon which to grow our
business.
Valuable Store Locations. A majority of our core markets are in densely
populated metropolitan areas, where we currently control many convenient store
locations under long-term leases. We believe our market
S-28
positions in such metropolitan areas are somewhat insulated from competition
arising from new stores due to the scarcity of suitable real estate available to
new entrants.
Strong Franchise Value. We operate a portfolio of well-recognized
supermarket banners, including A&P, Food Emporium, Waldbaum's, Super Fresh,
Super Foodmart, Sav-A-Center, Farmer Jack and Kohl's in the United States and
A&P, Dominion and Food Basics in Canada. All of these banners have a long
history in the markets in which they operate and have a broad base of
customers. In addition, Eight O'Clock Coffee, one of our most well-recognized
private label brands, is the leading whole bean coffee retail brand in the
United States, accounting for over 50% of the U.S. whole bean retail market in
2000 by volume. We believe the strength of our banners increases our ability
to retain existing shoppers and attract new customers to our stores.
Strong, Incentivized Management Team. During the past two years, we have
strengthened our management team through the addition of experienced
executives across key functions of our organization including marketing,
category management, supply chain management, information technology, finance,
human resources and store operations. In January 2001, Elizabeth Culligan
joined our management team as our Chief Operating Officer following her
service as President of Nabisco International. Our other new executives also
have substantial experience with leading supermarket and consumer products
companies including Campbell Soup Company, Unilever, Fred Meyer, H.E. Butt and
Harris Teeter. These additions complement the experience and leadership
provided over the past several years by Christian Haub, Chairman, President
and Chief Executive Officer, and Fred Corrado, Vice Chairman and Chief
Financial Officer. Our team is incentivized by a performance-based
compensation plan, which includes bonus payments and stock option grants based
on individual and corporate-level operating goals.
Our Stores
As of September 8, 2001, we operated 743 retail stores and serviced 67
franchised stores. Within our store base, we operate three differentiated
formats to meet the regional preferences and competitive dynamics of our
different operating areas:
o Full-service, high-end supermarkets offer differentiated product
assortments and services to our metropolitan area customers. The stores
compete based on high-end product selection and freshness, as well as
superior customer service. Our banners which operate full-service, high-
end stores include Food Emporium in the New York metropolitan area and
Dominion Stores in Toronto, Ontario.
o Traditional supermarkets offer a full merchandise assortment, as well as
other services including pharmacy and banking. The stores compete based
on product selection, freshness, customer service and price. Our banners
which operate traditional supermarkets include A&P, Waldbaum's, Farmer
Jack, Kohl's, Super Fresh and Sav-A-Center.
o Limited assortment, value-priced stores offer less extensive merchandise
offerings and few services at the locations, with a greater emphasis on
value and bulk sales. The stores compete based primarily on price. Our
limited assortment, value-priced stores operate under the Food Basics
banner in Ontario, Canada.
S-29
Our stores are operated in four major regions as follows:
Atlantic Region
----------------------------------------
New York Middle New Midwest Southern Total Canada Total Franchised
Banner Metropolitan Atlantic(2) England(2) Region Region United States Region Stores Stores
- ------ ------------ ----------- ---------- ------- -------- ------------- ------ ------ ----------
A&P............. 89 10 16 -- 3 118 75 193 --
Food Emporium... 39 -- -- -- -- 39 -- 39 --
Waldbaum's...... 80 -- -- -- -- 80 -- 80 --
Super Fresh..... -- 94 -- -- -- 94 -- 94 --
Farmer Jack..... -- 6 -- 111 -- 117 -- 117 --
Kohl's.......... -- -- -- 35 -- 35 -- 35 --
Sav-A-Center.... 6 1 -- -- 23 30 -- 30 --
Super Foodmart.. -- -- 27 -- -- 27 -- 27 --
Dominion........ -- -- -- -- -- -- 72 72 --
Food Basics..... -- -- -- -- -- -- 13 13 67
Other (1)....... 13 1 16 -- -- 30 13 43 --
--- --- -- --- -- --- --- --- --
Total........... 227 112 59 146 26 570 173 743 67
=== === == === == === === === ==
- ---------------
(1) Includes The Barn Markets, Ultra Food & Drug and liquor stores.
(2) Excluding New York metropolitan area.
As of September 8, 2001, the total area of all company-operated retail
stores is 27.8 million square feet, averaging approximately 37,500 square feet
per store. Excluding liquor and Food Emporium stores, which are generally
smaller in size, the average store size is approximately 39,800 square feet.
The stores built by us over the past several years, and those planned for the
remainder of fiscal 2001 and thereafter, generally range in size from 50,000
to 60,000 square feet. The selling area of the new stores is approximately 74%
of the total square footage.
As of September 8, 2001, we serviced 67 franchised stores in Ontario,
Canada. The franchised locations operate primarily under the Food Basics
banner, which is a limited service, value-oriented supermarket concept. The
total area of all franchised stores is 2.0 million square feet averaging
approximately 29,700 square feet per store. We are the exclusive wholesaler of
inventory to our franchised stores. During fiscal 2000, 1999 and 1998, we had
wholesale sales to these franchised stores of $638 million, $523 million and
$387 million, respectively, and $362 million during the first half of fiscal
2001. 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 nominal fee,
which mainly represents the reimbursement of costs incurred to provide such
services.
Supply and Distribution
We operate 14 warehouses that service our store network. We have one
warehouse in each of Indiana, Louisiana, Maryland, Pennsylvania and Wisconsin,
two in each of Michigan, New Jersey and New York and three in Ontario, Canada.
In general, we self distribute products from our warehouses to our stores. In
New England, we outsource the distribution function to C&S Wholesale Grocers
Inc. and, in the New York metropolitan area, we outsource the distribution of
dairy and frozen products to White Rose Food Division of DiGiorgio
Corporation.
Competition
The supermarket business is highly competitive throughout the market areas
served by us and is generally characterized by low profit margins on sales
with earnings primarily dependent upon rapid inventory turnover, effective
cost controls and the ability to achieve high sales volume. We compete for
sales and store locations with a number of national and regional chains, many
independent and cooperative stores and small markets and a variety of non-
traditional format stores. See "Risk Factors--The retail food industry is
highly competitive."
S-30
Employees
As of September 8, 2001, we had approximately 83,000 employees, of which 69%
were employed on a part-time basis. Approximately 89% of our employees are
covered by union contracts. We believe that our relations with our employees
are good. See "Risk Factors--Our business could be adversely affected by
increasing labor costs and costs associated with labor unions."
Legal Proceedings
On January 13, 2000, the Attorney General of the State of New York filed an
action in New York Supreme Court, County of New York, alleging that A&P and
its subsidiary Shopwell, Inc., together with our outside delivery service
Chelsea Trucking, Inc., violated New York law by failing to pay minimum and
overtime wages to individuals who deliver groceries at a Food Emporium store
in New York City. The complaint seeks a determination of violation of law, an
unspecified amount of restitution, an injunction and costs. A purported class
action lawsuit was filed on January 13, 2000 in the federal district court for
the Southern District of New York against A&P, Shopwell, Inc. and others by
Faty Ansoumana and others. The federal court action makes similar minimum wage
and overtime pay allegations under both federal and state law and extends the
allegations to various stores operated by us. In December 2000, the plaintiffs
in the federal court action accepted a $3 million offer of judgment made by
us, such offer being conditional upon the federal court entering an order
certifying a class consisting of the individuals who are the subject of a
pending motion by the plaintiffs for class certification. Such amount has been
accrued for and is included in "Other accruals" on our consolidated balance
sheets. The federal court has entered such an order, but a settlement remains
subject to approval by the court. If the court approves a settlement, this
judgment will also resolve all related claims of the New York Attorney
General.
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. See "Risk Factors--Because we
own and operate real estate, we face the risk of being held liable for
environmental damages that may occur on our properties." 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.
S-31
MANAGEMENT
The following table sets forth certain information relating to our directors
and executive officers as of September 8, 2001.
Name Age Position
---- --- --------
Christian W.E. Haub ..................................... 37 Chairman of the Board, President and Chief
Executive Officer
Fred Corrado ............................................ 61 Vice Chairman of the Board and Chief
Financial Officer
Elizabeth Culligan ...................................... 51 Executive Vice President, Chief Operating
Officer
William P. Costantini ................................... 54 Senior Vice President, General Counsel and
Secretary
Mitchell P. Goldstein ................................... 40 Senior Vice President, Finance and Treasurer
Nicholas L. Ioli, Jr. ................................... 57 Senior Vice President, Chief Information
Officer
Laurane S. Magliari ..................................... 51 Senior Vice President, People Resources and
Services
Brian Pall .............................................. 41 Senior Vice President, Chief Development
Officer
Brian Piwek ............................................. 54 Vice Chairman, President and Chief Executive
Officer, The Great Atlantic & Pacific Tea
Company of Canada, Limited
Donald J. Sommerville ................................... 42 Senior Vice President, Chief Marketing Officer
Craig C. Sturken ........................................ 57 President and Chief Executive Officer, Atlantic
Region Operations
John D. Barline ......................................... 54 Director
Rosemarie Baumeister .................................... 67 Director
Bobbie Gaunt ............................................ 54 Director
Helga Haub .............................................. 66 Director
Dan Kourkoumelis ........................................ 50 Director
Edward Lewis ............................................ 61 Director
Richard L. Nolan ........................................ 61 Director
Maureen B. Tart-Bezer ................................... 43 Director
Christian W.E. Haub was elected a director on December 3, 1991 and was
elected to his current position effective May 1, 2001. Mr. Haub had served as
President and Chief Operating Officer of A&P from December 7, 1993, becoming
Co-Chief Executive Officer on April 2, 1997 and sole Chief Executive Officer
on May 1, 1998. He is Chairman of the Executive Committee and a member of the
Finance Committee. Mr. Haub is a partner of Tengelmann and son of Erivan and
Helga Haub. Mr. Haub is on the board of the Food Marketing Institute.
Fred Corrado has been a director since 1990. Mr. Corrado was elected Vice
Chairman of the Board on October 6, 1992 and has served as Chief Financial
Officer since joining A&P in 1987. He is Vice Chairman of the Executive
Committee and a member of the Finance Committee. Mr. Corrado is a director of
the New Jersey Performing Arts Center and Covenant House.
Elizabeth Culligan was elected Executive Vice President and Chief Operating
Officer effective January 8, 2001. Prior to joining A&P, Ms. Culligan was
President, Nabisco International at Nabisco Holdings Corporation since 1998
and, before that, Senior Vice President, Marketing, Nabisco Biscuit Division
S-32
since 1996. Prior to joining Nabisco, Ms. Culligan held senior management
positions in the pharmaceutical industry with companies such as CIBA-GEIGY,
SmithKline Beecham and Sterling Winthrop.
William P. Costantini was elected Senior Vice President, General Counsel &
Secretary effective April 24, 2000. Prior to joining A&P, Mr. Costantini was
Executive Vice President & General Counsel of Olsten Corporation and, before
that, Senior Vice President & General Counsel of Olsten.
Mitchell P. Goldstein was elected Senior Vice President, Finance & Treasurer
effective January 17, 2000. Prior to joining A&P, Mr. Goldstein was Chief
Financial Officer at Vlasic Foods International, and, before that, Vice
President of Strategic Planning and Corporate Development at Vlasic Foods
International. Before that, Mr. Goldstein was Vice President of Strategic
Planning at Campbell Soup Company.
Nicholas L. Ioli, Jr. was elected Senior Vice President, Chief Information
Officer on July 13, 1999. Prior to joining A&P, Mr. Ioli was Vice President,
Chief Information Officer, Citizens Utilities Company.
Laurane S. Magliari was elected Senior Vice President, People Resources and
Services on February 16, 1999. Prior to joining A&P, Ms. Magliari was Vice
President, Human Resources, Publishers Clearing House and, before that, Vice
President, Global Marketing, The Chase Manhattan Bank.
Brian Pall was appointed Chief Development Officer of the Company on May 1,
2000. Prior to that, Mr. Pall was Senior Vice President, Development and,
before that, Corporate Vice President, Real Estate Development.
Brian Piwek was appointed Vice Chairman, President and Chief Executive
Officer of The Great Atlantic & Pacific Company of Canada, Limited on February
14, 2000. Before that, Mr. Piwek was Vice Chairman and Co-Chief Executive
Officer of The Great Atlantic & Pacific Company of Canada, Limited. Prior to
joining A&P, he was President of Overwaitea Food Group, a retailer and
franchisor in British Columbia and Alberta, Canada.
Donald J. Sommerville was appointed Senior Vice President, Chief Marketing
Officer on October 4, 2000. Prior to that, Mr. Sommerville was Vice President
and General Manager of the Company's Compass Foods division since 1998. Prior
to joining A&P, Mr. Sommerville was Director of Marketing at the Lipton
Company.
Craig C. Sturken was appointed President and Chief Executive Officer,
Atlantic Region on October 25, 2000. Prior to that, Mr. Sturken was Chief
Executive Officer, Midwestern Operations and, before that, Group Vice
President, Michigan and Chairman and Chief Executive Officer of The Great
Atlantic & Pacific Tea Company of Canada, Limited.
John D. Barline was elected a director on July 9, 1996. He is Chairman of
the Compensation Committee and a member of the Governance and Executive
Committees. Mr. Barline, an attorney in private practice since 1973, is
currently associated with the law firm Williams, Kastner & Gibbs LLP in
Tacoma, Washington. His areas of practice include corporate tax law, mergers
and acquisitions, general business law, estate planning and real estate. He
provides personal legal services to the Haub family, including Helga and
Erivan Haub and Christian Haub. Mr. Barline is a member of the Board of
Directors and corporate secretary of Sun Mountain Resorts, Inc. He is also on
the Board of Directors of Sun Mountain Lodge, Inc. and Wissoll Trading
Company, Inc. These are small closely held corporations owned primarily by the
Haub family. He is a member of the Board of the Franciscan Foundation, the Le
May Automobile Museum and Precision Machine Works, Inc.
Rosemarie Baumeister has been a director since 1979. She is a member of the
Compensation Committee. Ms. Baumeister currently serves as Senior Vice
President of Tengelmann. Prior to assuming her present position, she has
served in various executive capacities with Tengelmann. Mrs. Baumeister is a
member of the Supervisory Board of Kaiser's Tengelmann AG (formerly Kaiser's
Kaffee-Geschaft AG), an affiliate of Tengelmann, a member of the Supervisory
Board of Tengelmann Espana and a member of the Advisory Board of Deutsche
Bank.
Bobbie Gaunt was elected a director on May 15, 2001. She is a member of the
Compensation and Audit Committees. Mrs. Gaunt was a Vice President of Ford Motor
Company since 1999 and served as President
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and Chief Executive Officer of the Ford Motor Company of Canada LTD from 1996
until her recent retirement to return to the United States. She started her
career with Ford Motor Company, North America, in 1972 as a Field Manager and
thereafter served in various managerial positions including positions in sales,
marketing, research and merchandising.
Helga Haub has been a director since 1979. She is a member of the Executive
and the Finance Committees. Mrs. Haub is a member of the Supervisory Board of
Kaiser's Tengelmann AG (formerly Kaiser's Kaffee-Geschaft AG), an affiliate of
Tengelmann, a consultant to Tengelmann and has an interest in Tenga Capital
Corporation. She is also a director of The George C. Marshall Home
Preservation Fund, Inc., a member of the Board of Governors of World USO,
president of the Board of Trustees of the Elizabeth Haub Foundation for
Environmental Policy and Law and a member of the Advisory Board of GfK
Gesellschaft fur Konsumforschung, Germany. Mrs. Haub is the wife of Erivan
Haub and mother of Christian W.E. Haub.
Dan Kourkoumelis was elected a director on March 21, 2000. He is Chairman of
the Governance Committee and a member of the Audit and Executive Committees.
Mr. Kourkoumelis was President and Chief Operating Officer of Quality Food
Centers, Inc. from May 1989 until September 1996, and thereafter President and
Chief Executive Officer of Quality Food Centers, Inc. until September 25,
1998, when he retired after Quality Food Centers, Inc. was acquired. He also
served as a director of Quality Food Centers, Inc. from April 1991 until March
1998. Mr. Kourkoumelis is a director of Expeditors International and Briazz,
Inc. and a director and past president of the Western Association of Food
Chains.
Edward Lewis was elected a director on May 16, 2000. He is a member of the
Executive, Finance and Governance Committees. Mr. Lewis is Chairman and Chief
Executive Officer of Essence Communications, Inc. He is co-founder and
publisher of Essence magazine, chairman of TransAfrica Forum and a trustee of
Tuskegee University. Mr. Lewis is a director of the New York City Partnership,
the Times Square Business Improvement District, the Jazz Committee of the
Board of Lincoln Center for the Performing Arts, Girls, Inc. and the Central
Park Conservancy. He is a member of the Leadership Council of the Tanenbaum
Center for Interreligious Understanding and a committee member of the Minority
Business Roundtable of the Joint Center for Political and Economic Studies.
Mr. Lewis also served as chairman of the Magazine Publishers of America from
1997 to 1999, becoming the first African-American to hold this position in the
75-year history of the organization.
Richard L. Nolan was elected a director on October 5, 1999. He is a member
of the Governance and Executive Committees, and Chairman of the Audit
Committee as of May 15, 2001. Mr. Nolan, William Barclay Harding Professor of
Management of Technology at the Harvard Business School since 1991, is the
originator of the "Stages Theory," one of the most widely used management
frameworks for information technology baselining and planning. He is also a
member of the Board of Directors for Novell, Surebridge, Inc. and Zefer.
Maureen B. Tart-Bezer was elected a director on May 15, 2001. She is a
member of the Audit and Finance Committees. Ms. Tart-Bezer is Executive Vice
President & General Manager of American Express Company, U.S. Consumer Charge
Group. Prior to her current position, Ms. Tart-Bezer was Vice President &
Chief Financial Officer of American Express Company, Traveler's Division. From
1997 to March 2000 Ms. Tart-Bezer served in various financial capacities with
AT&T Corporation, most recently as Vice President and Chief Financial Officer-
Consumer Services Group. Ms. Tart-Bezer has served as a trustee of the AT&T
Foundation and on the board of directors for AT&T Capital and Lucent
Technology. She is an advisor to St. Peter's College in Jersey City, NJ and is
on the board of directors of Mamamedia.com, a pre-IPO company.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Secured Revolving Credit Facility
On February 23, 2001, we entered into a secured revolving credit facility
with JPMorgan Chase Bank (as successor to The Chase Manhattan Bank), JPMorgan
Bank Canada (formerly known as The Chase Manhattan Bank of Canada), GMAC
Commercial Credit LLC, GMAC Business Credit, LLC, Foothill Capital, The Bank
of Nova Scotia and other lenders. The Chase Manhattan Bank serves as U.S.
administrative agent and The Chase Manhattan Bank of Canada serves as Canadian
administrative agent under the secured revolving credit facility. The secured
revolving credit facility is comprised of a U.S. portion, as to which A&P and
certain of its subsidiaries are borrowers, that allows us to borrow up to $340
million on a revolving basis and a Canadian portion, as to which The Great
Atlantic & Pacific Company of Canada, Limited is the borrower, that allows us
to borrow up to $85 million (Cdn$133 million at September 8, 2001) on a
revolving basis. Drawings under the U.S. and Canadian portions are subject to
the satisfaction of certain conditions precedent, including the maintenance of
a certain level of security interest in our inventory and real estate. Letters
of credit are also available to us under the secured revolving credit
facility. Aggregate letters of credit outstanding under both the U.S. and
Canadian portions at any time may not exceed $100 million.
The revolving loans borrowed under the secured revolving credit facility may
be prepaid by us at any time and will mature on December 31, 2003. The
revolving credit loans are subject to a borrowing base. Any time the amount of
outstanding revolving loans exceeds the then applicable borrowing base, we
will be required to repay outstanding loans in an amount equal to such excess.
The outstanding revolving loans under the secured revolving credit facility
bear interest, at our option, at a base rate, Canadian prime rate or an
adjusted LIBOR, plus an applicable margin that varies depending on our credit
rating. Interest on base rate loans and Canadian prime rate loans is payable
quarterly in arrears, and interest on LIBOR loans is payable at the end of the
interest period therefor (or every three months if the interest period exceeds
three months). We must pay an unused commitment fee of 0.50% and we also are
required to pay fees for letters of credit issued on our behalf under the
secured revolving credit facility.
A&P's obligations under the U.S. portion of the secured revolving credit
facility are guaranteed on a joint and several basis by A&P's direct and
indirect domestic subsidiaries. Obligations under the Canadian portion of the
secured revolving credit facility are guaranteed on a joint and several basis
by A&P's Canadian subsidiaries. Our obligations under the secured revolving
credit facility and those of our subsidiaries under their respective
guarantees are secured by a significant portion of our and their assets,
including inventory and certain owned real estate.
The secured revolving credit facility requires us to comply, on a
consolidated basis, with certain financial ratios and tests, including ratios
of EBITDA to fixed charges and total indebtedness to EBITDA. The credit
agreement also contains certain restrictive covenants that, among other
things, limit our ability and the ability of our subsidiaries to:
o dispose of assets;
o make capital expenditures per fiscal year in excess of the sum of any
proceeds received during the fiscal year from sales of fixed or capital
assets (subject to certain restrictions) plus an amount ranging from $300
million to $350 million;
o incur indebtedness or liens;
o pay dividends or make other payments in respect of capital stock or
subordinated indebtedness;
o make investments or other acquisitions;
o engage in mergers or consolidations;
o engage in transactions with affiliates; and
o engage in any business other than specified businesses.
The secured revolving credit facility contains customary events of default,
including, among other things:
o failure to pay principal when due;
o failure to pay interest or fees within three business days after they
become due;
o inaccuracy of representations and warranties in any material respect;
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o default by us or our subsidiaries in the performance of certain covenants
and other obligations which, in some cases, continues for thirty days;
o default by us or our subsidiaries in respect of any of such person's
indebtedness above specified levels;
o occurrence of certain bankruptcy events;
o entry of certain judgments against us or our subsidiaries;
o occurrence of a change of control (as defined in the secured revolving
credit facility); and
o existence of certain ERISA claims or liabilities.
7.70% Senior Notes due 2004
In January 1994, we issued $200 million aggregate principal amount of 7.70%
Senior Notes due January 15, 2004. Interest on the 2004 Notes is payable semi-
annually on January 15 and July 15 of each year. The 2004 Notes are our
unsecured, senior obligations. The 2004 Notes are not guaranteed by any of our
subsidiaries. The 2004 Notes were issued under our senior debt securities
indenture which contains, among other provisions, covenants restricting the
incurrence of secured debt, sales with lease backs and mergers and sales of
assets. The 2004 Notes are not redeemable prior to maturity. On November 19,
2001, we commenced a tender offer to purchase any and all of the 2004 Notes.
See "Summary--Tender Offer."
7.75% Senior Notes due 2007
In April 1997, we issued $300 million aggregate principal amount of 7.75%
Notes due April 15, 2007 (the "2007 Notes"). Interest on the 2007 Notes is
payable semi-annually on April 15 and October 15 of each year. The 2007 Notes
are our unsecured, senior obligations. The 2007 Notes are not guaranteed by
any of our subsidiaries. The 2007 Notes were issued under our senior debt
securities indenture which contains, among other provisions, covenants
restricting the incurrence of secured debt, sales with lease backs and mergers
and sales of assets. The 2007 Notes are not redeemable prior to maturity.
9.375% Senior Quarterly Interest Bonds due 2039
In August 1999, we issued $200 million aggregate principal amount of 9.375%
Senior Quarterly Interest Bonds due August 1, 2039 (the "2039 Bonds").
Interest on the 2039 Bonds is payable quarterly on February 1, May 1, August 1
and November 1 of each year. The 2039 Bonds are our unsecured, senior
obligations. The 2039 Bonds are not guaranteed by any of our subsidiaries. The
2039 Notes were issued under our senior debt securities indenture which
contains, among other provisions, covenants restricting the incurrence of
secured debt, sales with lease backs and mergers and sales of assets.
The 2039 Bonds are redeemable, at our option, in whole at any time or in
part from time to time, on or after August 11, 2004 at a redemption price
equal to 100% of the principal amount of the 2039 Bonds to be redeemed plus
accrued and unpaid interest to the date of redemption, subject to certain
conditions.
In addition, if as a result of
o any actual or proposed change in or amendment to the laws (or any
regulations or rulings promulgated thereunder) of the United States, or
any change in the application, official interpretation or enforcement of
such laws, regulations or rulings,
o any action taken by a taxing authority, which action is generally applied
or is taken with respect to us,
o a decision rendered by a court of competent jurisdiction in the United
States, whether or not such decision was rendered with respect to us, or
o a technical advice memorandum or letter ruling or other administrative
pronouncement issued by the National Office of the United States Internal
Revenue Service, on substantially the same facts as those pertaining to
us,
which is effective or issued on or after the issue date of the 2039 Bonds,
there is a substantial likelihood that we will not be entitled to deduct
currently for United States federal income tax purposes the full amount of
interest accrued in respect of the 2039 Bonds, we may, at our option, redeem
the 2039 Bonds, in whole but not in part, at any time at a redemption price
equal to 100% of the principal amount of the 2039 Bonds plus interest accrued
to the date of redemption, subject to certain conditions.
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DESCRIPTION OF THE NOTES
You can find the definitions of certain terms used in this description under
the caption "--Certain Definitions." In this description, the words "we",
"us", "our" or "A&P" refer only to The Great Atlantic & Pacific Tea Company,
Inc. and not to any of our subsidiaries.
The terms of the 9 1/8% Senior Notes due 2011 are described below. Our debt
securities are described in the prospectus that follows this prospectus
supplement. The provisions described below supplement, and to the extent they
conflict they supersede, the information in the prospectus with respect to our
debt securities.
We will issue the notes under an existing indenture, dated as of January 1,
1991 (the "existing indenture"), between ourselves and JPMorgan Chase Bank
(formerly The Chase Manhattan Bank as successor by merger to Manufacturers
Hanover Trust Company), as trustee and under the second supplemental indenture
to be dated as of December 20, 2001 (the "supplemental indenture", and
together with the existing indenture, the "indenture"), between ourselves and
the trustee. We have filed a copy of the existing indenture as an exhibit to
the registration statement of which this prospectus supplement is a part. The
terms of the notes include those stated in the indenture and those made part
of the indenture by reference to the Trust Indenture Act of 1939. We urge you
to read the indenture because it, and not this description, defines your
rights as holders of the notes. A copy of the supplemental indenture will be
filed as an exhibit to a Form 8-K incorporated by reference into the
registration statement of which this prospectus supplement forms a part.
The notes will be issued as a separate series of senior debt securities
under the indenture, and accordingly will vote as a separate series from other
series of senior debt securities on matters under the indenture.
As of the date of the supplemental indenture, all of our subsidiaries will
be "Restricted Subsidiaries." However, under the circumstances described below
under the caption "--Certain Covenants--Designation of Restricted and
Unrestricted Subsidiaries," we will be permitted to designate one or more of
our subsidiaries as "Unrestricted Subsidiaries." Our Unrestricted Subsidiaries
will not be subject to many of the restrictive covenants in the indenture.
Only registered Holders will have rights under the indenture.
Principal, Maturity and Interest
The existing indenture does not limit the aggregate principal amount of debt
securities which may be issued thereunder. We may issue additional debt
securities from time to time after this offering.
The supplemental indenture authorizes us to issue up to $400.0 million in
aggregate principal amount of notes, of which $275.0 million will be issued in
this offering. We may issue additional notes from time to time after this
offering. The notes and any additional notes subsequently issued under the
supplemental indenture will be treated as a single class for all purposes
under the indenture, including, without limitation, waivers, amendments,
redemptions and offers to purchase. Any offering of additional notes or other
debt securities is subject to the covenant described below under the caption
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock."
We will issue notes in denominations of $1,000 and integral multiples of
$1,000. The notes will mature on December 15, 2011.
Interest on the notes will accrue at the rate of 9 1/8% per annum and will
be payable semi-annually in arrears on June 15 and December 15 of each year,
commencing on June 15, 2002. We will make each interest payment to the Holders
of record on the June 1 and December 1 immediately preceding each interest
payment date.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
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Ranking
The notes will be:
o our general senior unsecured obligations;
o equal (pari passu) in right of payment with all of our existing and
future unsecured senior Indebtedness, including our 2004 Notes (as to
which we are conducting a concurrent tender offer), 2007 Notes and 2039
Notes; and
o senior in right of payment to any of our future subordinated
Indebtedness.
However, the notes are effectively subordinated to borrowings under our
secured revolving credit facility, which is secured by a substantial portion
of our assets and the assets of our subsidiaries, and any future secured debt
to the extent of the assets securing such Indebtedness. See "Risk Factors--
Risks Related to the Notes--Because our secured revolving credit facility is
secured by substantially all of our assets, it is possible that in the event
of insolvency or liquidation there would be insufficient assets remaining to
satisfy the claims of the holders of the notes."
A majority of our assets and operations are located in our subsidiaries. We
will rely on dividends and advances and transfers of funds from our
subsidiaries to generate the funds necessary to meet our ongoing debt service
obligations, including payment of our obligations under the notes. The notes
will be effectively subordinated in right of payment to all Indebtedness and
other liabilities and commitments (including trade payables and lease
obligations) of our subsidiaries. Any right we may have to receive assets of
any of our subsidiaries upon the subsidiary's liquidation or reorganization
(and the consequent right of the holders of the notes to participate in those
assets) will be effectively subordinated to the claims of that subsidiary's
creditors, except to the extent that we are recognized as a creditor of the
subsidiary, in which case our claims would still be subordinate in right of
payment to any security in the assets of the subsidiary and any indebtedness
of the subsidiary senior to that held by us. See "Risk Factors--Risks Related
to the Notes--The notes are effectively subordinated to the obligations of our
subsidiaries, and your right to receive payments on the notes could be
adversely affected if any of our subsidiaries declare bankruptcy, liquidate or
reorganize."
As of September 8, 2001, assuming we had completed this offering and applied
the net proceeds as described in "Use of Proceeds," we and our subsidiaries
would have had approximately $166 million of senior secured debt outstanding
(including obligations under capital leases) and our subsidiaries would have
had no unsecured obligations effectively ranking senior to the notes. In
addition, as of September 8, 2001, on the same basis, we would have had
approximately $502 million of senior unsecured debt ranking equal to the
notes.
Paying Agent and Registrar for the Notes
The trustee will initially act as paying agent and registrar. We may change
the paying agent or registrar without prior notice to the Holders of the
notes, and we or any of our Subsidiaries may act as paying agent or registrar.
Transfer and Exchange
A Holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a Holder to furnish appropriate
endorsements and transfer documents in connection with a transfer of notes.
Holders will be required to pay all taxes due on transfer. We are not required
to transfer or exchange any note selected for redemption. Also, we are not
required to transfer or exchange any note for a period of 15 days before a
selection of notes to be redeemed.
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Optional Redemption
At any time prior to December 15, 2004, we may redeem up to 35% of the
original aggregate principal amount of notes issued under the supplemental
indenture at a redemption price of 109.125% of the principal amount, plus
accrued and unpaid interest to the redemption date, with the net cash proceeds
of one or more Equity Offerings; provided that:
(1) at least 65% of the original aggregate principal amount of notes
issued under the supplemental indenture remains outstanding
immediately after the occurrence of such redemption (excluding notes
held by us and our Subsidiaries); and
(2) the redemption occurs within 90 days of the date of the closing of
such Equity Offering.
Except pursuant to the preceding paragraph, the notes will not be redeemable
at our option prior to December 15, 2006.
On or after December 15, 2006, we may redeem all or a part of the notes, at
any time or from time to time, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest on the notes
redeemed, to the applicable redemption date, if redeemed during the twelve-
month period beginning on December 15 of the years indicated below:
Year Percentage
---- ----------
2006 ................................ 104.563%
2007 ................................ 103.042%
2008 ................................ 101.521%
2009 and thereafter ................. 100.000%
Mandatory Redemption
We are not required to make mandatory redemption or sinking fund payments
with respect to the notes.
Future Subsidiary Guarantees
As of the date of the supplemental indenture, none of our Subsidiaries will
Guarantee our obligations on the notes. However, without your consent, we and
any or all of our Subsidiaries may at any time enter into a supplemental
indenture with the trustee to provide for unconditional Guarantees (each a
"Subsidiary Guarantee" and collectively, the "Subsidiary Guarantees") of the
notes on a joint and several, senior unsecured basis by our Subsidiaries party
to such supplemental indenture. Each such Subsidiary Guarantee will be limited
as necessary to prevent such Subsidiary Guarantee from constituting a
fraudulent conveyance under applicable law.
If a Subsidiary issues a Subsidiary Guarantee, such Subsidiary Guarantee may
be released without your consent:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of the issuing Subsidiary Guarantor
(including by way of merger or consolidation) to a Person that is
not (either before or after giving effect to such transaction) our
Restricted Subsidiary;
(2) in connection with any sale of the Capital Stock of a Subsidiary
Guarantor (such that after giving effect to such sale, such Person
is no longer a Subsidiary of the Company) to a Person that is not
(either before or after giving effect to such transaction) our
Restricted Subsidiary;
(3) if we properly designate any Restricted Subsidiary that is a
Subsidiary Guarantor as an Unrestricted Subsidiary; or
(4) if the Subsidiary Guarantor has no outstanding Indebtedness (other
than Indebtedness that is permitted to be incurred by a Restricted
Subsidiary that is not a Subsidiary Guarantor) at the time of release
of its Subsidiary Guarantee and at the time of such release does not
Guarantee any
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Indebtedness (other than Indebtedness that is permitted to be incurred
by a Restricted Subsidiary that is not a Subsidiary Guarantor).
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each Holder of notes will have the right to
require us to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that Holder's notes pursuant to a Change of Control
Offer (as defined in the indenture) on the terms set forth in the indenture.
In the Change of Control Offer, we will offer a Change of Control Payment (as
defined in the indenture) in cash equal to 101% of the aggregate principal
amount of notes repurchased plus accrued and unpaid interest on the notes
repurchased, to the date of purchase. Within 30 days following any Change of
Control or, at our option, prior to any Change of Control but after it is
publicly announced, we will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase notes on the Change of Control Payment Date specified in the
notice, which date will be no earlier than 30 days and no later than 60 days
from the date such notice is mailed, pursuant to the procedures required by
the indenture and described in such notice. We will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent those laws and regulations are
applicable in connection with the repurchase of the notes as a result of a
Change of Control. To the extent that the provisions of any securities laws or
regulations conflict with the Change of Control provisions of the indenture,
we will comply with the applicable securities laws and regulations and will
not be deemed to have breached our obligations under the Change of Control
provisions of the indenture by virtue of such conflict.
On the Change of Control Payment Date, we will, to the extent lawful:
(1) accept for payment all notes or portions of notes properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes
properly tendered; and
(3) deliver or cause to be delivered to the trustee the notes properly
accepted together with an officers' certificate stating the
aggregate principal amount of notes or portions of notes being
purchased by us.
The paying agent will promptly mail to each Holder of notes properly
tendered the Change of Control Payment for such notes, and the trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new note equal in principal amount to any unpurchased portion of
the notes surrendered, if any; provided, that each new note will be in a
principal amount of $1,000 or an integral multiple of $1,000.
The provisions described above that require us to make a Change of Control
Offer following a Change of Control will be applicable whether or not any
other provisions of the indenture are applicable. Except as described above
with respect to a Change of Control, the indenture does not contain provisions
that permit the Holders of the notes to require that we repurchase or redeem
the notes in the event of a takeover, recapitalization or similar transaction.
We will not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by us and purchases all
notes properly tendered and not withdrawn under the Change of Control Offer.
The definition of Change of Control includes a phrase relating to the
direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of the properties or assets of us and our Restricted
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of notes to require us to repurchase its notes as a result of a sale,
lease, transfer,
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conveyance or other disposition of less than all of the assets of us and our
Restricted Subsidiaries taken as a whole to another Person or group may be
uncertain.
Our secured revolving credit facility contains, and any future agreements
relating to indebtedness to which we become a party may contain, restrictions
or prohibitions on our ability to purchase notes or may provide that an
occurrence of a Change of Control constitutes an event of default, or
otherwise requires payment of amounts borrowed, under those agreements. If a
Change of Control occurs at a time when we are prohibited from purchasing the
notes, we could seek the consent of our then existing lenders and other
creditors to the purchase of the notes or could attempt to refinance the
indebtedness that contains the prohibition. If we do not obtain such a consent
or repay such indebtedness, we would remain prohibited from purchasing the
notes. In that case, our failure to purchase tendered notes would constitute
an event of default under the indenture governing the notes and may constitute
a default under the terms of other indebtedness that we may enter into from
time to time. See "Risk Factors--Risks Related to the Notes--We may not have
the ability to raise the funds necessary to finance the change of control
offer required by the indenture governing the notes."
Asset Sales
We will not, and will not permit any of our Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) we (or the Restricted Subsidiary, as the case may be) receive
consideration at the time of the Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold
or otherwise disposed of; and
(2) at least 75% of the consideration received in the Asset Sale by us
or such Restricted Subsidiary is in the form of Qualified
Consideration.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale, we
may:
(1) apply such Net Proceeds to repay Indebtedness and other Obligations
under the revolving credit loan portion of a Credit Facility;
(2) apply such Net Proceeds to permanently repay the term loan portion
of any Credit Facility or repay other Indebtedness ranking pari
passu with the notes that has a Stated Maturity prior to the Stated
Maturity of the notes;
(3) apply such Net Proceeds to acquire all or substantially all of the
assets of, or at least a majority of the Voting Stock of, a Person
engaged in a Permitted Business;
(4) apply such Net Proceeds to make after the date of the occurrence of
such Asset Sale one or more capital expenditures to be used in a
Permitted Business; or
(5) enter into a binding agreement to apply such Net Proceeds to acquire
long-term assets that are used or useful in a Permitted Business
that will result in such acquisition being completed within 18
months of the date of such Asset Sale.
Pending the final application of any Net Proceeds, we may apply the Net
Proceeds in any manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When
the aggregate amount of Excess Proceeds exceeds $15.0 million, we will be
required to make an Asset Sale Offer to all Holders of notes and all holders
of other Indebtedness that is pari passu with the notes containing provisions
similar to those set forth in the indenture with respect to offers to purchase
or redeem with the proceeds of sales of assets to purchase on a pro rata basis
(based on the purchase price) the maximum principal amount of notes and such
other pari passu Indebtedness that may be purchased out of the Excess
Proceeds.
The offer price in any Asset Sale Offer will be equal to 100% of the
principal amount to be redeemed plus accrued and unpaid interest to the date of
purchase, and will be payable in cash. If any Excess Proceeds remain after
consummation of an Asset Sale Offer, we may use those Excess Proceeds for any
purpose not
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otherwise prohibited by the indenture. If the aggregate principal amount of
notes tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds
available to purchase notes, the trustee will select the notes to be purchased
on a pro rata basis. Upon completion of each Asset Sale Offer, the amount of
Excess Proceeds will be reset at zero.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent those
laws and regulations are applicable in connection with each repurchase of
notes pursuant to an Asset Sale Offer. To the extent that the provisions of
any securities laws or regulations conflict with the Asset Sale provisions of
the indenture, we will comply with the applicable securities laws and
regulations and will not be deemed to have breached our obligations under the
Asset Sale provisions of the indenture by virtue of such conflict.
Our secured revolving credit facility restricts our ability to purchase any
notes prior to their Stated Maturity. The agreement governing our secured
revolving credit facility also restricts our ability to make an Asset Sale. In
addition, any future agreements relating to Indebtedness to which we become a
party may contain such prohibitions or restrictions.
Certain Covenants
Restricted Payments
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of our Equity Interests other than dividends
or distributions payable in our Equity Interests (other than
Disqualified Stock);
(2) purchase, redeem or otherwise acquire or retire for value any of our
Equity Interests not held by a Restricted Subsidiary other than in
exchange for our Equity Interests (other than Disqualified Stock);
(3) make any payment on or with respect to, or purchase, redeem, defease
or otherwise acquire or retire for value prior to its Stated
Maturity, any Subordinated Debt (other than the purchase,
redemption, defeasance or other acquisition or retirement of
Subordinated Debt within one year of its Stated Maturity); or
(4) make any Restricted Investment (all such payments and other actions
set forth in these clauses (1) through (4) being collectively
referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or
would occur as a consequence of such Restricted Payment;
(2) we would after giving pro forma effect to such Restricted Payment,
have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described below under
the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock;" and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by us and our Restricted Subsidiaries
after the date of the supplemental indenture (excluding Restricted
Payments permitted by clauses (2), (3) and (4) of the next
succeeding paragraph), is less than the sum, without duplication,
of:
(a) 50% of our Consolidated Net Income for the period (taken as one
accounting period) from the beginning of the first fiscal
quarter commencing immediately prior to the date of the
supplemental indenture to the end of our most recently ended
fiscal quarter for which financial statements are available at
the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such
deficit), plus
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(b) 100% of the aggregate net cash proceeds received by us plus, if
at the time we receive such property our common stock is
publicly traded, the fair market value of any property received
by us for use in a Permitted Business, since the date of the
supplemental indenture as a contribution to our common equity
capital or from the issue or sale of our Equity Interests
(other than Disqualified Stock) or from the issue or sale of
our convertible or exchangeable Disqualified Stock or our
convertible or exchangeable Indebtedness that have been
converted into or exchanged for such Equity Interests (other
than Equity Interests (or convertible or exchangeable
Disqualified Stock or Indebtedness) sold to one of our
Subsidiaries), plus
(c) to the extent not included in Consolidated Net Income, each
reduction in a Restricted Investment made after the date of the
supplemental indenture (including if such reduction occurs by
reason of the return of equity capital, the repayment of loans
or advances or other transferred assets or the redesignation of
Unrestricted Subsidiaries as Restricted Subsidiaries), not to
exceed, (i) in the case of cash received by us with respect to
such Restricted Investment, the lesser of (x) the cash return
on invested capital received by us with respect to such
Restricted Investment and (y) the initial amount of such
Restricted Investment, or (ii) in the case of assets
transferred to us with respect to such Restricted Investment,
the lesser of (x) the fair market value of such assets at the
time of our receipt of such assets and (y) the initial amount
of such Restricted Investment or (iii) in the case of the
redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary, the lesser of (x) the fair market value of our
Investment in such Subsidiary as of the date of such
redesignation and (y) such fair market value as of the date on
which such Subsidiary was originally designated as an
Unrestricted Subsidiary, plus
(d) $10.0 million.
So long as no Default or Event of Default has occurred and is continuing or
would be caused thereby (except as to clauses (1) and (2) below), the
preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration the
dividend payment would have complied with the provisions of the
indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any of our Subordinated Debt or of any of our Equity
Interests in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to any of our
Subsidiaries) of, our Equity Interests (other than Disqualified
Stock); provided that the amount of any such net cash proceeds that
are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition will be excluded from clause (3) (b)
of the preceding paragraph;
(3) the redemption, repurchase, retirement, defeasance or other
acquisition of any of our Subordinated Debt or of our Disqualified
Stock (a) in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to any of our
Subsidiaries) of, our Disqualified Stock, or (b) pursuant to a
required change of control offer or asset sale offer arising from a
Change of Control or Asset Sale, as the case may be, and occurring
after the making and consummation of a related Change of Control
Offer or Asset Sale Offer for the notes;
(4) the payment of regular stated dividends on Disqualified Stock to the
extent that such dividends are included in the calculation of "Fixed
Charges";
(5) the repurchase, redemption or other acquisition or retirement for
value of any of our Equity Interests held by any member of our
management pursuant to any management equity subscription agreement,
stock option agreement or similar agreement; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests may not exceed $1.5 million in any fiscal
year (with unused amounts in any fiscal year being carried over to
succeeding fiscal years subject to a maximum of $2.5 million
actually paid in any fiscal year); and
(6) the redemption, repurchase, retirement, defeasance or other
acquisition of our Subordinated Debt with the net cash proceeds of
Indebtedness meeting the criteria set forth in clauses (1)-(5) of
the definition of Permitted Refinancing Indebtedness.
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The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by us or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are to be valued at $10.0
million or more for purposes of this covenant will be determined by the Board
of Directors and evidenced by a resolution thereof. Not later than 90 days
after the date of making any non-cash Restricted Payment which alone, or
together with all other non-cash Restricted Payments made during the then-
current fiscal year, would result in the aggregate amount of non-cash
Restricted Payments made during such current fiscal year exceeding $25.0
million, we will deliver to the trustee an officers' certificate stating that
such Restricted Payment is permitted and setting forth the basis upon which
the calculations required by this "Restricted Payments" covenant were
computed.
Incurrence of Indebtedness and Issuance of Preferred Stock
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect
to (collectively, "incur") any Indebtedness, and we will not issue any
Disqualified Stock and will not permit any of our Restricted Subsidiaries to
issue any shares of preferred stock; provided, however, that we or any
Subsidiary Guarantor may incur Indebtedness or issue Disqualified Stock or
preferred stock, as the case may be, and our Restricted Subsidiaries may incur
Acquired Debt, and we or our Restricted Subsidiaries may acquire Persons who
become Restricted Subsidiaries and have preferred stock outstanding that was
not issued in contemplation of such acquisition, if our Fixed Charge Coverage
Ratio for our most recently ended four full fiscal quarters for which
financial statements are available immediately preceding the date on which
such additional Indebtedness is incurred or such Disqualified Stock is issued
would have been at least 2.25 to 1.0, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred or the Disqualified Stock had been
issued, as the case may be, at the beginning of such four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence of any
of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by us and any of our Restricted Subsidiaries of
Indebtedness under Credit Facilities in an aggregate principal
amount at any one time outstanding under this clause (1) (with
letters of credit being deemed to have a principal amount equal to
the maximum potential liability of us and our Restricted
Subsidiaries thereunder) not to exceed (i) the greater of (x) $450.0
million or (y) the Borrowing Base Amount less (ii) the amount of
Indebtedness incurred and outstanding under clause (9) below;
(2) the incurrence by us and our Restricted Subsidiaries of Existing
Indebtedness;
(3) the incurrence by us of $275.0 million of Indebtedness represented
by the notes to be issued on the date of the supplemental indenture;
(4) at any time when our Fixed Charge Coverage Ratio for our most
recently ended four full fiscal quarters for which financial
statements are available immediately preceding the date on which
such Indebtedness is incurred would have been at least 2.25 to 1.0
(determined on a pro forma basis (including a pro forma application
of the net proceeds therefrom) as if such Indebtedness had been
incurred at the beginning of such four-quarter period), the
incurrence by us or any of our Restricted Subsidiaries of
Indebtedness incurred for the purpose of financing all or any part
of the purchase price or cost of construction or improvement of
property, plant or equipment used in a Permitted Business not to
exceed, in the aggregate at any time outstanding, an amount equal to
5.0% of our and our Restricted Subsidiaries' Consolidated Assets
provided, that in each case the principal or capitalized amount of
such financing does not exceed 100% of the cost of acquiring,
constructing or improving such properties, plants or equipment
(inclusive of fees and expenses associated therewith) less the
amount of Permitted Refinancing Indebtedness incurred to Refinance
any such Indebtedness;
(5) the incurrence by us or any of our Restricted Subsidiaries of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which
are used to refund, refinance or replace Indebtedness
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(other than intercompany Indebtedness) that was permitted by the
indenture to be incurred under the first paragraph of this covenant or
clauses (2), (3), (4), (5) or (8) of this paragraph;
(6) the incurrence by us or any of our Restricted Subsidiaries of
intercompany Indebtedness between or among us and any of our Restricted
Subsidiaries; provided, however, that (i) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than us or one of our Restricted Subsidiaries and
(ii) any sale or other transfer of any such Indebtedness to a Person
that is not either us or one of our Restricted Subsidiaries; will be
deemed, in each case, to constitute an incurrence of such Indebtedness
by us or such Restricted Subsidiary, as the case may be, that was not
permitted by this clause (6);
(7) the incurrence by us or any of our Restricted Subsidiaries of Interest
Hedging Obligations and Currency Hedging Obligations;
(8) at any time when our Fixed Charge Coverage Ratio for our most recently
ended four full fiscal quarters for which financial statements are
available immediately preceding the date on which such Capital Lease
Obligations are incurred would have been at least 2.25 to 1.0
(determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom) as if such Capital Lease Obligation had been
incurred at the beginning of such four-quarter period), the incurrence
by us or any of our Restricted Subsidiaries of Capital Lease Obligations
not to exceed, in the aggregate at any time outstanding, an amount equal
to 10.0% of our and our Restricted Subsidiaries' Consolidated Assets
less the amount of Permitted Refinancing Indebtedness incurred to
Refinance any Indebtedness incurred pursuant to this clause (8);
(9) the incurrence by Foreign Subsidiaries of Indebtedness in an aggregate
principal amount at any time outstanding not to exceed $150.0 million;
provided that any amounts outstanding under this clause (9) will reduce
amounts otherwise available under clause (1) above;
(10) the incurrence by us or any of our Restricted Subsidiaries of
Indebtedness in respect of letters of credit, surety bonds, performance
bonds, completion guarantees or workers' compensation claims provided in
the ordinary course of business;
(11) the incurrence by us or any of our Restricted Subsidiaries of
Indebtedness consisting of guarantees, indemnities or obligations in
respect of purchase price adjustments in connection with the acquisition
or disposition of assets;
(12) Indebtedness consisting of guarantees of Indebtedness of third parties
given in connection with the acquisition or improvement of real property
for use in a Permitted Business not to exceed $10.0 million at any time
outstanding;
(13) the Guarantee by us or any Subsidiary Guarantor of our Indebtedness or
Indebtedness of any Restricted Subsidiary permitted to be incurred by
another provision of this covenant; and
(14) the incurrence by us or any of our Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount at any time
outstanding not to exceed $50.0 million.
For purposes of determining compliance with this "Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant, in the event that an item of
proposed Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (1) through (14) above, or is entitled to
be incurred pursuant to the first paragraph of this covenant, we will be
permitted to classify such item of Indebtedness on the date of its incurrence,
or later reclassify all or a portion of such item of Indebtedness, in any
manner that complies with this covenant. The accrual of interest, the
accretion or amortization of original issue discount, the payment of interest
on any Indebtedness in the form of additional Indebtedness with the same
terms, and the payment of dividends on Disqualified Stock in the form of
additional shares of the same class of Disqualified Stock will not be deemed
to be an incurrence of Indebtedness or an issuance of Disqualified Stock for
purposes of this covenant.
For purposes of determining compliance with any U.S. dollar-denominated
restriction on the incurrence of Indebtedness, the U.S. dollar-equivalent
principal amount of Indebtedness denominated in a foreign
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currency shall be calculated based on the relevant currency exchange rate in
effect on the date such Indebtedness was incurred, in the case of term
Indebtedness, or first committed, in the case of revolving credit Indebtedness;
provided that if such Indebtedness is Incurred to refinance other Indebtedness
denominated in a foreign currency, and such refinancing would cause the
applicable U.S. dollar-denominated restriction to be exceeded if calculated at
the relevant currency exchange rate in effect on the date of such refinancing,
such U.S. dollar-denominated restriction shall be deemed not to have been
exceeded so long as the principal amount of such refinancing Indebtedness does
not exceed the principal amount of such Indebtedness being refinanced. The
principal amount of any Indebtedness incurred to refinance other Indebtedness,
if incurred in a different currency from the Indebtedness being refinanced,
shall be calculated based on the currency exchange rate applicable to the
currencies in which such refinancing Indebtedness is denominated that is in
effect on the date of such refinancing.
Liens
We will not, and will not permit any of our Restricted Subsidiaries to,
create, incur, assume or otherwise cause or suffer to exist or become
effective any Lien of any kind (other than Permitted Liens) securing
Indebtedness upon any of our or their property or assets, now owned or
hereafter acquired, unless all payments due under the indenture and the notes
are secured on an equal and ratable basis with the Indebtedness so secured
until such time as such Indebtedness is no longer secured by a Lien.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock
to us or any of our Restricted Subsidiaries, or with respect to any
other interest or participation in, or measured by, its profits, or
pay any indebtedness owed to us or any of our Restricted
Subsidiaries;
(2) make loans or advances to us or any of our Restricted Subsidiaries;
or
(3) transfer any of its properties or assets to us or any of our
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) contractual encumbrances or restrictions as in effect on the date of
the supplemental indenture and any amendments, modifications,
restatements, renewals, increases, supplements, refundings,
replacements or refinancings of those agreements, provided that the
amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are no more
restrictive, taken as a whole, with respect to such dividend and
other payment restrictions than those contained in those agreements
on the date of the supplemental indenture;
(2) the supplemental indenture and the notes;
(3) applicable law or any applicable rule, regulation or order;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by us or any of our Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Indebtedness
or Capital Stock was incurred in connection with or in contemplation
of such acquisition), and any amendments, modifications,
restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, which encumbrance or
restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or
assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the
indenture to be incurred provided, further that any such amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are no more restrictive,
taken as a whole, with respect to such dividend and other payment
restrictions than those contained in the original instrument at the
time of such acquisition;
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(5) customary non-assignment provisions in leases, licenses,
encumbrances, contracts or similar assets entered into in the
ordinary course of business and consistent with past practices;
(6) purchase money obligations that impose restrictions on that property
of the nature described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of the stock,
business, assets or property of a Restricted Subsidiary;
(8) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than the
dividend and other payment restrictions contained in the agreements
governing the Indebtedness being refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred under
the provisions of the covenant described above under the caption "--
Liens" that limit the right of the debtor to dispose of the assets
subject to such Liens;
(10) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements, asset sale agreements,
stock sale agreements and other similar agreements;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business;
(12) agreements governing Credit Facilities, Currency Hedging
Obligations, Interest Hedging Obligations, Indebtedness of Foreign
Subsidiaries or Indebtedness incurred under clause (14) of the
second paragraph under "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock";
(13) customary provisions of any franchise, distribution or similar
agreements; and
(14) any encumbrance or restriction which by its terms permits the
payment of dividends and the making of other distributions, making
of loans or advances or transfer of properties or assets to us to
the extent needed to pay principal, premium, if any, and interest on
the notes at their Stated Maturity.
Merger, Consolidation or Sale of Assets
We may not, directly or indirectly: (1) consolidate or merge with or into
another Person (whether or not we are the surviving corporation); or (2) sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of the properties or assets of us and our Restricted Subsidiaries taken as
a whole, in one or more related transactions, to another Person; unless:
(1) either: (a) we are the surviving corporation; or (b) the Person
formed by or surviving any such consolidation or merger (if other
than us) or to which such sale, assignment, transfer, conveyance or
other disposition has been made is a corporation organized or
existing under the laws of the United States, any state of the
United States or the District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger
(if other than us) or the Person to which such sale, assignment,
transfer, conveyance or other disposition has been made assumes all
our obligations under the notes and the indenture pursuant to
agreements reasonably satisfactory to the trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) we or the Person formed by or surviving any such consolidation or
merger (if other than us), or to which such sale, assignment,
transfer, conveyance or other disposition has been made will, on the
date of such transaction after giving pro forma effect thereto and
any related financing transactions as if the same had occurred at
the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
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This "Merger, Consolidation or Sale of Assets" covenant will not apply to a
sale, assignment, transfer, conveyance or other disposition of assets between
or among us and any of our Wholly Owned Restricted Subsidiaries.
Designation of Restricted and Unrestricted Subsidiaries
Our Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if (1) that designation would not cause a Default or
an Event of Default and (2) we are permitted to make the Investment described
in the next sentence. If a Restricted Subsidiary is designated as an
Unrestricted Subsidiary, the aggregate fair market value of all outstanding
Investments owned by us and our Restricted Subsidiaries in the Subsidiary (and
its Subsidiaries) so designated will be deemed to be an Investment made as of
the time of the designation and will reduce the amount available for
Restricted Payments under the first paragraph of the covenant described above
under the caption "--Restricted Payments" or reduce the amount available for
future Investments under one or more clauses of the definition of Permitted
Investments, as determined by us.
Our Board of Directors may at any time designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided that such designation will be deemed to
be an incurrence of Indebtedness by such Restricted Subsidiary of any
outstanding Indebtedness of such Subsidiary and such designation will only be
permitted if (1) such Indebtedness is permitted under the covenant described
above under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock," calculated on a pro forma basis as if such designation had occurred at
the beginning of the four-quarter reference period; and (2) no Default or Event
of Default would be in existence following such designation. Any designation of
an Unrestricted Subsidiary as a Restricted Subsidiary will be evidenced to the
trustee by filing with the trustee a certified copy of the resolution of our
Board of Directors giving effect to such designation and an officers'
certificate certifying that such designation was permitted by this covenant.
Transactions with Affiliates
We will not, and will not permit any of our Restricted Subsidiaries to, make
any payment to, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter
into or make or amend any transaction, contract, agreement, understanding,
loan, advance or guarantee with, or for the benefit of, any Affiliate (each,
an "Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable to
us or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by us or such Restricted
Subsidiary with an unrelated Person; and
(2) we deliver to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in
excess of $10.0 million, a resolution of the Board of Directors
set forth in an officers' certificate certifying that such
Affiliate Transaction complies with this covenant and that such
Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in
excess of $25.0 million, an opinion as to the fairness to us or
the relevant Restricted Subsidiary of such Affiliate
Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national
standing.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement, stock options or other compensation
agreements or plans and other reasonable fees, compensation benefits
and indemnities paid or entered into by us or any of our Restricted
Subsidiaries in the ordinary course of business to or with our and
our Restricted Subsidiaries' officers, directors and employees;
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(2) transactions between or among us and/or our Restricted Subsidiaries;
(3) transactions with a Person that is our Affiliate solely because we
own an Equity Interest in such Person;
(4) transactions with suppliers or other purchasers or sales of goods or
services, in each case in the ordinary course of business
(including, without limitation, pursuant to joint venture
agreements) and otherwise in accordance with the terms of the
indenture which are fair to us or our Restricted Subsidiaries, in
the good faith determination of our Board of Directors or our senior
management and are on terms at least as favorable as might
reasonably have been obtained at such time from an unaffiliated
party;
(5) issuances of Equity Interests (other than Disqualified Stock) to our
Affiliates; and
(6) Restricted Payments that are permitted by the provisions of the
covenant described above under the caption "--Restricted Payments."
Business Activities
We will not, and will not permit any Restricted Subsidiary to, engage in any
business other than Permitted Businesses, except to such extent as would not
be material to us and our Restricted Subsidiaries taken as a whole.
Reports
We will:
(1) file with the trustee, within 15 days after we are required to file
the same with the Commission, copies of the annual reports and of
the information, documents and other reports (or copies of such
portions of any of the foregoing as the Commission prescribes) which
we may be required to file with the Commission pursuant to Section
13 or Section 15(d) of the Exchange Act; or, if we are not required
to file information, documents or reports pursuant to either of said
Sections, then we shall file with the trustee and the Commission, in
accordance with rules and regulations prescribed from time to time
by the Commission, such of the supplementary and periodic
information, documents and reports which may be required pursuant to
Section 13 of the Exchange Act in respect of a security listed and
registered on a national securities exchange as may be prescribed
from time to time in such rules and regulations;
(2) file with the trustee and the Commission, in accordance with the
rules and regulations prescribed from time to time by the
Commission, such additional information, documents and reports with
respect to compliance by us with the conditions and covenants of the
indenture as may be required from time to time by such rules and
regulations; and
(3) transmit by mail to all Holders, as their names and addresses appear
in the security register, within 30 days after the filing thereof
with the trustee, such summaries of any information, documents and
reports required to be filed by us pursuant to paragraph (1) and (2)
above as may be required by rules and regulations prescribed from
time to time by the Commission.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on the
notes;
(2) default in payment when due of the principal of, or premium, if any,
on the notes;
(3) failure by us or any of our Subsidiaries to comply with the
provisions described under the captions "--Repurchase at the Option
of Holders--Change of Control" or "--Certain Covenants--Merger,
Consolidation or Sale of Assets;"
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(4) failure by us or any of our Restricted Subsidiaries for 60 days
after notice by the trustee or by the Holders of at least 25% in
principal amount of notes then outstanding to comply with any of the
other agreements in the indenture;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by us or any of our Restricted
Subsidiaries (or the payment of which is guaranteed by us or any of
our Restricted Subsidiaries) whether such Indebtedness or guarantee
now exists, or is created after the date of the supplemental
indenture, if that default:
(a) is caused by a failure to pay principal on such Indebtedness
prior to the expiration of the grace period provided in such
Indebtedness (a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity,
and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $25.0 million (or its
equivalent in foreign currency calculated in a manner consistent
with the last paragraph of the covenant described under "--
Incurrence of Indebtedness and Issuance of Preferred Stock") or
more;
(6) failure by us or any of our Significant Subsidiaries to pay final
judgments aggregating in excess of $25.0 million or its equivalent
in foreign currency determined as of the date of such final judgment
(net of any amounts covered by an effective insurance policy), which
judgments are not paid, discharged, rescinded, annulled or stayed
for a period of 60 days;
(7) except as permitted by the supplemental indenture, if any Subsidiary
Guarantee shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason (other than
in accordance with the terms of such Subsidiary Guarantee and the
supplemental indenture) to be in full force and effect or if any
Subsidiary Guarantor, or any Person acting on behalf of any
Subsidiary Guarantor, shall deny or disaffirm its obligations under
its Subsidiary Guarantee; and
(8) certain events of bankruptcy or insolvency with respect to us or
with respect to any Significant Subsidiary or group of Restricted
Subsidiaries that would collectively constitute a Significant
Subsidiary.
In the case of an Event of Default arising from certain events of bankruptcy
or insolvency with respect to us, all outstanding notes will become due and
payable immediately without further action or notice. If any other Event of
Default occurs and is continuing, the trustee or the Holders of at least 25%
in principal amount of the then outstanding notes may declare all the notes to
be due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, Holders of a
majority in aggregate principal amount of the then outstanding notes may
direct the trustee in its exercise of any trust or power. The trustee may
withhold from Holders of the notes notice of any continuing Default or Event
of Default if it determines that withholding notes is in their interest,
except a Default or Event of Default relating to the payment of principal or
interest.
In the event of a declaration of acceleration of the notes because an Event
of Default has occurred and is continuing as a result of the acceleration of
any Indebtedness described in clause (5) above, the declaration of
acceleration of the notes shall be automatically annulled if (x) the holders
of any Indebtedness described in such clause (5) have rescinded or waived the
declaration of acceleration in respect of such Indebtedness within 60 days of
the date of such declaration, (y) the default that is the basis for such Event
of Default has been cured or (z) the Indebtedness or Guarantee that is the
basis for such Event of Default has been discharged and if (a) the annulment
of the acceleration of notes would not conflict with any judgment or decree of
a court of competent jurisdiction and (b) all existing Events of Default,
except nonpayment of principal or interest on the notes that become due solely
because of the acceleration of the notes, have been cured or waived.
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The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the Holders of all of
the notes waive any existing Default or Event of Default and its consequences
under the indenture except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the notes.
We are required to deliver to the trustee annually a statement regarding
compliance with the indenture. Upon becoming aware of any Default or Event of
Default, we are required to deliver to the trustee a statement specifying such
Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
None of our directors, officers, employees, incorporators or stockholders,
as such, will have any liability for any of our obligations under the notes,
the indenture, or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of notes by accepting a note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. The waiver may not be effective to
waive liabilities under the federal securities laws.
Legal Defeasance and Covenant Defeasance
We may, at our option and at any time, elect to have all of our obligations
discharged with respect to the outstanding notes and all obligations of any
Subsidiary Guarantors discharged with respect to their Subsidiary Guarantees
("Legal Defeasance") except for:
(1) the rights of Holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium, if any, on such
notes when such payments are due from the trust referred to below;
(2) our obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for
payment and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and our obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to have our and
our Subsidiaries' obligations released with respect to certain covenants that
are described in the indenture ("Covenant Defeasance") and thereafter any
omission to comply with those covenants will not constitute a Default or Event
of Default with respect to the notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "--Events of Default and
Remedies" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) we must irrevocably deposit with the trustee, in trust, for the
benefit of the Holders of the notes, cash in U.S. dollars, non-
callable Government Securities, or a combination of cash in U.S.
dollars and non-callable Government Securities, in amounts as will
be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, or interest
and premium, if any, on the outstanding notes on the stated maturity
or on the applicable redemption date, as the case may be, and we
must specify whether the notes are being defeased to maturity or to
a particular redemption date;
(2) in the case of Legal Defeasance, we have delivered to the trustee an
opinion of counsel (with customary assumptions and exceptions)
reasonably acceptable to the trustee confirming that (a) we have
received from, or there has been published by, the Internal Revenue
Service a ruling or (b) since the date of the supplemental indenture,
there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of
counsel will confirm that, the Holders of the outstanding notes will
not recognize income, gain or loss for federal
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income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal
Defeasance had not occurred; provided that this clause (2) shall not
apply in the case of any Legal Defeasance occuring within one year of
the Stated Maturity of the notes or after such time as all outstanding
notes have been called for redemption in accordance with "--Optional
Redemption."
(3) in the case of Covenant Defeasance, we have delivered to the trustee
an opinion of counsel (with customary assumptions and exceptions)
reasonably acceptable to the trustee confirming that the Holders of
the outstanding notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; provided that this clause
(3) shall not apply in the case of any Covenant Defeasance occuring
within one year of the Stated Maturity of the notes or after such
time as all outstanding notes have been called for redemption in
accordance with "--Optional Redemption."
(4) no Default or Event of Default has occurred and is continuing on the
date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such
deposit);
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the indenture) to which we or
any of our Restricted Subsidiaries is a party or by which we or any
of our Restricted Subsidiaries is bound;
(6) we must deliver to the trustee an officers' certificate stating that
the deposit was not made by us with the intent of preferring the
Holders of notes over the other of our creditors with the intent of
defeating, hindering, delaying or defrauding our creditors or
others; and
(7) we must deliver to the trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent
relating to the Legal Defeasance or the Covenant Defeasance have
been complied with.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the indenture or
the notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes
(other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on any
note;
(4) waive a Default or Event of Default in the payment of principal of,
or interest or premium, if any, on the notes (except a rescission of
acceleration of the notes by the Holders of at least a majority in
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aggregate principal amount of the notes and a waiver of the payment
default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of Holders of notes to
receive payments of principal of, or interest or premium, if any, on
the notes;
(7) waive an optional redemption payment with respect to any note after
it is called for redemption;
(8) make any change in any Subsidiary Guarantee that would adversely
effect the Holders or release any Subsidiary Guarantor from its
obligations under its Subsidiary Guarantee or the supplemental
indenture, except in accordance with the terms of the supplemental
indenture; or
(9) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any Holder of notes,
we and the trustee may amend or supplement the indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of our obligations to Holders of notes
in the case of a merger or consolidation or sale of all or
substantially all of our assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders of notes or that does not adversely affect
the legal rights under the indenture of any such Holder;
(5) to comply with requirements of the Commission in order to effect or
maintain the qualification of the indenture under the Trust
Indenture Act;
(6) to provide for or release Subsidiary Guarantees in accordance with
the provisions of the indenture; and
(7) to secure the notes or release any such security in accordance with
the covenant described above under the caption "Certain Covenants--
Liens".
Fall Away Event
In the event of the occurrence of a Fall Away Event, the covenants and
provisions described above under "--Repurchase at the Option of Holders--
Change of Control" and "--Asset Sales," "--Certain Covenants--Restricted
Payments," "--Incurrence of Indebtedness and Issuance of Preferred Stock,"
"--Liens," "--Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries," "--Merger, Consolidation or Sale of Assets," "--Designation of
Restricted and Unrestricted Subsidiaries," and "--Transactions with
Affiliates" and "--Events of Default and Remedies" shall each no longer be in
effect for the remaining term of the notes and any Subsidiary Guarantees then
in effect shall be automatically released; provided that the covenants and
provisions described in the accompanying prospectus under "Description of Debt
Securities--Restricted and Unrestricted Subsidiaries," "--Restrictions upon
Secured Debt," "--Restrictions upon Sales with Leases Back," "--Restriction
upon Merger and Sale of Assets" and "--Events of Default" and the definitions
relevant thereto shall thereafter become in effect; provided further that any
Liens incurred or sale and leaseback transactions entered into prior to the
Fall Away Event shall be deemed permitted under such covenants whether or not
such Liens and sale and leaseback transactions would otherwise be permitted.
Prior to the occurrence of a Fall Away Event, the covenants and provisions
described in the accompanying prospectus under "Description of Debt
Securities--Restricted and Unrestricted Subsidiaries," "--Restrictions upon
Secured Debt," "--Restrictions upon Sales with Leases Back," "--Restrictions
upon Merger and Sale of Assets," and "--Events of Default" and the definitions
relevant thereto will not apply and the corresponding provisions of the
existing indenture will be without force and effect.
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Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated, except lost, stolen or
destroyed notes that have been replaced or paid and notes for
whose payment money has been deposited in trust and thereafter
repaid to us, have been delivered to the trustee for
cancellation; or
(b) all notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the
mailing of a notice of redemption or otherwise or will become
due and payable within one year and we have irrevocably
deposited or caused to be deposited with the trustee as trust
funds in trust solely for the benefit of the Holders, cash in
U.S. dollars, non-callable Government Securities, or a
combination of cash in U.S. dollars and non-callable Government
Securities, in amounts as will be sufficient without
consideration of any reinvestment of interest, to pay and
discharge the entire indebtedness on the notes not delivered to
the trustee for cancellation for principal, premium, if any,
and accrued interest to the date of maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on the
date of the deposit or will occur as a result of the deposit (other
than a Default or Event of Default resulting from the borrowing of
funds to be applied to such deposit) and the deposit will not result
in a breach or violation of, or constitute a default under, any
other instrument to which we are a party or by which we are bound;
(3) we have paid or caused to be paid all sums due and payable by us
under the indenture; and
(4) we have delivered irrevocable instructions to the trustee under the
indenture to apply the deposited money toward the payment of the
notes at maturity or the redemption date, as the case may be.
In addition, we must deliver an officers' certificate and an opinion of
counsel to the trustee stating that all conditions precedent to satisfaction
and discharge have been satisfied.
Concerning the Trustee
If the trustee becomes one of our creditors, the indenture limits its right
to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or otherwise. The
trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest it must eliminate such conflict within 90
days, apply to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
occurs and is continuing, the trustee will be required, in the exercise of its
power, to use the degree of care of a prudent person in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation
to exercise any of its rights or powers under the indenture at the request of
any Holder of notes, unless such Holder has offered to the trustee security
and indemnity satisfactory to it against any loss, liability or expense.
Book-Entry, Delivery and Form
Except as described in the accompanying prospectus, the notes will be issued
in the form of one or more Global Notes (the "Global Notes"). The Global Notes
will be deposited on the date of the closing of this offering with, or on
behalf of, The Depository Trust Company ("DTC") and registered in the name of
Cede & Co., as nominee of DTC (such nominee being referred to herein as the
"Global Note Holder").
For additional information regarding the Global Notes and DTC see
"Description of Debt Securities--Global Securities" in the accompanying
prospectus.
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Same Day Settlement and Payment
We will make payments in respect of the notes represented by the Global
Notes (including principal, interest and premium, if any) by wire transfer of
immediately available funds to the accounts specified by the Global Note
Holder. We will make all payments of principal, interest and premium, if any,
with respect to certificated notes by wire transfer of immediately available
funds to the accounts specified by the Holders of certificated notes or, at
our option, at the office or agency of the paying agent and registrar within
the City and State of New York unless we elect to make interest payments by
mailing a check to each such Holder's registered address. The notes
represented by the Global Notes are expected to trade in DTC's Same-Day Funds
Settlement System, and any permitted secondary market trading activity in such
notes will, therefore, be required by DTC to be settled in immediately
available funds.
Certain Definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, Indebtedness of
any other Person existing at the time such other Person is merged with or into
or became a Subsidiary of such specified Person that is not Indebtedness
incurred in connection with, or in contemplation of, such other Person merging
with or into, or becoming a Subsidiary of, such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly Controlling or Controlled by or under direct or indirect common
Control with such specified Person.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than in the ordinary course of business consistent
with past practices; provided that the sale, conveyance or other
disposition of all or substantially all of the assets of us and our
Restricted Subsidiaries taken as a whole will be governed by the
provisions of the indenture described above under the caption
"--Certain Covenants--Merger, Consolidation or Sale of Assets" and
not by the provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests in any of our Restricted
Subsidiaries or the sale of Equity Interests in any of our
Restricted Subsidiaries.
Notwithstanding the preceding, the following items will not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that
involves assets having a fair market value of less than $2.0
million;
(2) a transfer of assets between or among us and our Restricted
Subsidiaries,
(3) an issuance of Equity Interests by a Restricted Subsidiary to us or
to another Restricted Subsidiary;
(4) the sale or lease of real property, equipment, inventory, accounts
receivable or other assets in the ordinary course of business (other
than pursuant to a sale and leaseback) and the sale or other
disposition of assets that have become obsolete or are no longer
used or useful in our business or the business of our Restricted
Subsidiaries, whether or not in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) a Restricted Payment or Permitted Investment that is permitted by
the covenant described above under the caption "--Certain
Covenants--Restricted Payments";
(7) the sale or disposition of any Restricted Investment;
(8) the surrender or waiver of contract rights or the settlement,
release or surrender of contract, tort or other claims of any kind;
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(9) the grant in the ordinary course of business of any non-exclusive
license of patents, trademarks, registration therefor and other
similar intellectual property; and
(10) sales of assets received as the result of the foreclosure upon a
Lien.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, (i) except that in calculating the
beneficial ownership of any particular "person" (as that term is used in
Section 13(d)(3) of the Exchange Act), such "person" will be deemed to have
beneficial ownership of all securities that such "person" has the right to
acquire by conversion or exercise of other securities, whether such right is
currently exercisable or is exercisable only upon the occurrence of a
subsequent condition, and (ii) with respect to any "person" that is a
Subsidiary of another Person other than an individual (with respect to such
Subsidiary, the "Parent"), the Beneficial Owners of such Parent, and not the
Parent itself, shall be deemed to be the Beneficial Owners of all securities
held by such Parent. The terms "Beneficially Owns" and "Beneficially Owned"
have a corresponding meaning.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the Board of Directors of the general
partner of the partnership; and
(3) with respect to any other Person, the board or committee of such
Person serving a similar function.
"Borrowing Base Amount" means, with respect to us and our Restricted
Subsidiaries, 65% of the book value of inventories of us and our Restricted
Subsidiaries on a consolidated basis at the end of the most recent fiscal
quarter preceding the date of determination for which financial statements are
available.
"Capital Lease Obligation'' means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents
(however designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited);
and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars and Canadian dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States or Canadian government or any agency or
instrumentality of the United States or Canadian government
(provided that the full faith and credit of the United States or
Canada is pledged in support of those securities) having maturities
of not more than one year from the date of acquisition;
(3) obligations issued or fully guaranteed by any state of the United
States of America or province of Canada or any political subdivision
of any such state or province or any public instrumentality thereof
maturing within one year from the date of acquisition and having a
rating of either "A" or better from Standard & Poor's or Moody's or
"A" from Dominion Bond Rating Service Limited ("DBRS");
(4) certificates of deposit and eurodollar time deposits with maturities
of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding one year and overnight
bank deposits, in each case, with any lender party to a Credit
Facility or with any United States or Canadian commercial bank
having capital and surplus in excess of $500.0 million;
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(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2), (3) and
(4) above entered into with any financial institution meeting the
qualifications specified in clause (4) above;
(6) commercial paper rated at least "P-2" by Moody's, at least "A-2" by
Standard & Poor's or at least R-1 (low) from DBRS and in each case
maturing within one year after the date of acquisition; and
(7) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (6)
of this definition.
"Change of Control" means the occurrence of any of the following:
(1) a person or group (within the meaning of Section 13(d)(3) of the
Exchange Act) other than the Permitted Holders becomes the
Beneficial Owner of Voting Stock representing more than (a) 35% of
the voting power of our outstanding Voting Stock and (b) the
aggregate voting power of our Voting Stock held by the Permitted
Holders;
(2) we consolidate with, or merge with or into, another Person or sell,
transfer, convey or dispose of, in one transaction or in a series of
related transactions, all or substantially all of our and our
Restricted Subsidiaries' assets taken as a whole to any person or
group (within the meaning of Section 13(d)(3) of the Exchange Act),
other than (a) a Permitted Holder, (b) in a transaction that results
in the Beneficial Owners of our Voting Stock immediately prior to
such transaction Beneficially Owning at least 50% of the voting
power of the Voting Stock of the surviving or transferee Person or
(c) in a transaction that results in no person or group (within the
meaning of Section 13(d)(3) of the Exchange Act) other than the
Permitted Holders becoming the Beneficial Owner of Voting Stock of
the surviving or transferee Person representing more than (i) 35% of
the voting power of the outstanding Voting Stock of such surviving
or transferee Person and (ii) the aggregate voting power of the
Voting Stock of such surviving or transferee Person held by the
Permitted Holders; or
(3) the first day on which a majority of the members of our Board of
Directors are not Continuing Directors.
"Consolidated Assets" means, with respect to any specified Person as of any
date of determination, the total amount of assets of such Person and its
Restricted Subsidiaries on a consolidated basis at the end of the most recent
fiscal quarter preceding such date of determination for which financial
statements for such Person are available.
"Consolidated Cash Flow" means, with respect to any specified Person for any
period, the Consolidated Net Income of such Person for such period plus:
(1) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net
Income; plus
(2) the Fixed Charges of such Person and its Restricted Subsidiaries, to
the extent that any such Fixed Charges were deducted in computing
such Consolidated Net Income; plus
(3) the portion of Net Income attributable to minority interests in
Restricted Subsidiaries (to the extent not included in calculating
Consolidated Net Income) except to the extent that the declaration
or payment of dividends or similar distributions with respect to
that Restricted Subsidiary of that Net Income is not at the date of
determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders; plus
(4) depreciation, amortization and other non-cash expenses of such
Person and its Restricted Subsidiaries for such period to the extent
that such depreciation, amortization and other non-cash expenses
were deducted in computing such Consolidated Net Income.
in each case, on a consolidated basis and determined in accordance with GAAP.
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"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of
accounting will be included only to the extent of the amount of
dividends or distributions paid in cash to the specified Person or a
Restricted Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary will be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is
not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or
its stockholders;
(3) the cumulative effect of a change in accounting principles will be
excluded; and
(4) the calculation of Consolidated Net Income will not give effect to,
without duplication, any deduction for (A) any increased
amortization, depreciation or cost of sales resulting from the
write-up of assets pursuant to Accounting Principles Board Opinion
Nos. 16 and 17, (B) the amortization of any intangible assets
(including amortization attributable to inventory write-ups,
goodwill and financing costs), (C) any nonrecurring charges relating
to any premium or penalty paid, write-off of deferred financing
costs or other financial recapitalization charges in connection with
redeeming or retiring any Indebtedness prior to its Stated Maturity,
(D) any non-cash nonrecurring charge arising out of the
restructuring or consolidation of the operations of any Persons or
businesses either alone or together with such Person or any
Restricted Subsidiary of such Person, and (E) any nonrecurring
charge arising out of the permanent closure of facilities of such
Person and its Restricted Subsidiaries during such period.
"Continuing Directors" means, as of any date of determination, any member of
our Board of Directors who:
(1) was a member of such Board of Directors (a) on the date of the
supplemental indenture or (b) for at least two consecutive years; or
(2) was nominated for election or elected to our Board of Directors with
the approval of a majority of the Continuing Directors who were
members of our Board of Directors at the time of such nomination or
election or the affirmative vote of a majority of the voting
strength of the Voting Stock of the Permitted Holders.
"Control," as used with respect to any Person, means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of such Person, whether through the ownership of voting
securities, by agreement or otherwise. For purposes of this definition, the
terms "Controlling," "Controlled by" and "under common Control with" have
correlative meanings.
"Credit Agreement" means the Credit Agreement dated as of February 23, 2001,
among us and certain of our Subsidiaries, the lenders party thereto, JPMorgan
Chase Bank (as successor to The Chase Manhattan Bank), as U.S. administrative
agent, JPMorgan Bank Canada (formerly known as The Chase Manhattan Bank of
Canada), as Canadian administrative agent, and the other agents party thereto,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
waived, modified, renewed, refunded, replaced or refinanced from time to time.
"Credit Facilities" means, one or more debt facilities or commercial paper
facilities (together with all documents, instruments and agreements executed
in connection therewith and Guarantees thereof and including, without
limitation, the Credit Agreement), in each case with banks or other
institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
waived, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
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"Currency Hedging Obligations" means with respect to any specified Person,
the obligations of such Person incurred in the ordinary course of business and
not for speculative purposes under any foreign exchange contract currency swap
agreement or similar agreement, together with any Guarantees of such
obligations by any Restricted Subsidiaries of such Person.
"Default" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder of the Capital Stock),
or upon the happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or redeemable at the
option of the holder of the Capital Stock, in whole or in part, on or prior to
the date that is 91 days after the date on which the principal amount of the
notes becomes due and payable or, if earlier, on which there are no notes
outstanding. Notwithstanding the preceding sentence, any Capital Stock that
would constitute Disqualified Stock solely because the holders of the Capital
Stock have the right to require us to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale will not constitute
Disqualified Stock if the terms of such Capital Stock provide that if a Change
of Control or Asset Sale shall occur, we may not repurchase or redeem any such
Capital Stock prior to satisfying any obligations we may have to make and
consummate a Change of Control Offer or Asset Sale Offer, as the case may be.
The amount of any Disqualified Stock outstanding as of any date will be the
greater of (x) its liquidation preference and (y) any mandatory redemption
payment obligations in respect of such Disqualified Stock.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any sale of Equity Interests (other than
Disqualified Stock) made for cash on a primary basis by us after the date of
the supplemental indenture.
"Existing Indebtedness" means Indebtedness of us and our Restricted
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the date of the supplemental indenture.
"Fall Away Event" means the notes shall have achieved Investment Grade
status and we deliver to the trustee an officers' certificate certifying the
satisfaction of such condition.
"Fixed Charge Coverage Ratio" means with respect to any specified Person for
any period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person
and its Restricted Subsidiaries for such period. In the event that the
specified Person or any of its Restricted Subsidiaries incurs, assumes,
Guarantees, repays, repurchases or redeems any Indebtedness (other than
ordinary working capital borrowings) or issues, repurchases or redeems any of
its Disqualified Stock or any preferred stock of its Restricted Subsidiaries
subsequent to the commencement of the period for which the Fixed Charge
Coverage Ratio is being calculated and on or prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made
(the "Calculation Date"), then the Fixed Charge Coverage Ratio will be
calculated giving pro forma effect to such incurrence, assumption, Guarantee,
repayment, repurchase or redemption of Indebtedness, or such issuance,
repurchase or redemption of Disqualified Stock of such Person or preferred
stock of such Person's Restricted Subsidiaries, and the use of the proceeds
therefrom as if the same had occurred at the beginning of the applicable
period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) Investments and acquisitions that have been made by the specified
Person or any of its Restricted Subsidiaries, including through
mergers or consolidations and including any related financing
transactions, during the applicable period or subsequent to such
period and on or prior to the Calculation Date will be given pro
forma effect as if they had occurred on the first day of the
applicable period and Consolidated Cash Flow for such reference
period will be calculated on a pro forma basis;
(2) the Consolidated Cash Flow attributable to discontinued operations
and operations or businesses disposed of prior to the Calculation
Date, will be excluded; and
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(3) the Fixed Charges attributable to discontinued operations, and
operations or businesses disposed of prior to the Calculation Date,
will be excluded, but only to the extent that the obligations giving
rise to such Fixed Charges will not be obligations of the specified
Person or any of its Restricted Subsidiaries following the
Calculation Date.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest on such Indebtedness shall be calculated as if the
rate in effect on the Calculation Date had been the applicable rate for the
entire period (taking into account any Interest Hedging Obligations applicable
to such Indebtedness). For purposes of making the computations referred to
above, interest on any Indebtedness under a revolving credit facility computed
on a pro forma basis shall be computed based on the weighted average daily
balance of such Indebtedness during the applicable period. Interest on
Indebtedness that may optionally be determined at an interest rate based upon
a factor of prime or similar rate, a eurocurrency interbank offered rate, or
other rate, shall be deemed to have been based upon the rate actually chosen
or, if none, then based upon such optional rate chosen as we may designate.
For purposes of this definition, whenever pro forma effect is to be given to a
transaction, the pro forma calculations shall be made in good faith by a
responsible financial or accounting officer of us (a) on a basis consistent
with the requirements of Regulation S-X promulgated pursuant to the Securities
Act or (b) who shall determine that the results of any pro forma adjustments
either have been realized or that steps necessary for such realization have
been taken or are reasonably expected to be taken within 90 days following the
transaction underlying such pro forma calculation, including, but not limited
to, the execution or termination of any contracts, the termination of any
personnel or the closing (or approval by such Person's Board of Directors of
any closing) of any facility, as applicable; provided that such adjustments
are set forth in an officers' certificate which states (1) the amount of such
adjustment or adjustments, and (2) that such adjustment or adjustments are
based on the reasonable good faith belief of the officers executing such
officers' certificate at the time of such execution.
"Fixed Charges" means, with respect to any specified Person or any of its
Restricted Subsidiaries for any period, the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued, including,
without limitation, amortization of original issue discount, non-
cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments
associated with Capital Lease Obligations, Indebtedness commissions,
discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, interest actually paid
by such Person or its Restricted Subsidiaries under any Guarantee of
Indebtedness or obligations of any other Person, and net of the
effect of all payments made or received pursuant to Interest Hedging
Obligations; provided that in no event shall any amortization of
financing costs incurred in good faith be included in Fixed Charges;
plus
(2) all regular stated dividends, whether paid or accrued and whether or
not in cash, on any series of Disqualified Stock of such Person or
any of its Restricted Subsidiaries, other than dividends on
Disqualified Stock payable in such Person's Equity Interests (other
than Disqualified Stock) or to such Person or its Restricted
Subsidiaries; plus
(3) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period.
"Foreign Subsidiary" means any Restricted Subsidiary that was organized
under the laws of a jurisdiction outside the United States of America.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, as in effect on the date of the supplemental indenture.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a
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pledge of assets or through letters of credit or reimbursement agreements in
respect thereof, of all or any part of any Indebtedness.
"Indebtedness" means, with respect to any specified Person, any indebtedness
of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof)
other than in respect of obligations constituting a trade payable
that are satisfied within 90 days of incurrence;
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase price
of any property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing any Interest Hedging Obligations or Currency Hedging
Obligations,
if and to the extent any of the preceding items (other than letters of credit,
Interest Hedging Obligations and Currency Hedging Obligations) would appear as
a liability upon a balance sheet of the specified Person prepared in
accordance with GAAP. In addition, the term "Indebtedness" includes all
Indebtedness of others secured by a Lien on any asset of the specified Person
(whether or not such Indebtedness is assumed by the specified Person) in an
amount equal to the lesser of (x) the fair market value of the property
subject to such Lien or (y) the accreted value of the Indebtedness so secured
and, to the extent not otherwise included (but without duplication), the
Guarantee by the specified Person of any Indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date will be:
(1) the accreted value of the Indebtedness, in the case of any
Indebtedness issued with original issue discount; and
(2) the principal amount of the Indebtedness, together with any interest
on the Indebtedness that is more than 30 days past due, in the case
of any other Indebtedness.
"Interest Hedging Obligations" means, with respect to any specified Person,
the obligations of such Person incurred in the normal course of business and
not for speculative purposes under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates;
together with any Guarantees of such obligations by any Restricted Subsidiary
of such Person.
"Investment Grade" means, with respect to the notes, a credit rating of at
least "Baa3" (or the equivalent) by Moody's, together with a rating of at
least "BBB-" (or the equivalent) by Standard & Poor's; provided that neither
of such rating or entities shall have announced a negative or similar outlook
or announced or informed us that it is reviewing the rating of the notes for
possible downgrading of the rating thereof.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the
forms of loans (including Guarantees or other obligations), advances or
capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness, and Equity Interests or
other securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the nature
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thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of any dividends in respect of Equity Interests,
excluding, however:
(1) any gain or loss, together with any related provision for taxes on
such gain or loss, realized in connection with: (a) any Asset Sale;
or (b) the disposition of any securities by such Person or any of
its Restricted Subsidiaries;
(2) any extraordinary gain (or loss), together with any related
provision for taxes on such extraordinary gain (or loss); and
(3) any non-cash items increasing such Net Income for such period, other
than accrual of revenue in the ordinary course of business, together
with any related provision for taxes on such non-cash items.
"Net Proceeds" means the aggregate cash proceeds received by us or any of
our Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-
cash consideration received in any Asset Sale), net of the costs relating to
such Asset Sale, including, without limitation, legal, accounting and
investment banking fees, and sales commissions, and any relocation expenses
incurred as a result of the Asset Sale, taxes paid or payable as a result of
the Asset Sale, in each case, after taking into account any available tax
credits or deductions and any tax sharing arrangements, and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means the lines of business conducted by us and our
Restricted Subsidiaries on the date of the supplemental indenture and business
incidental or reasonably related thereto or which is a reasonable extension
thereof.
"Permitted Holders" means (1) Tengelmann Warenhandelsgesellschaft, a
partnership organized under the laws of Germany ("Tengelmann"), (2) each
Affiliate of Tengelmann as of the date of the supplemental indenture, (3) each
partner of Tengelmann and the respective members of their immediate families
and (4) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially holding
a majority or more controlling interest of which consist of any one or more of
the Persons described in the preceding clauses (1), (2) and (3).
"Permitted Investments" means:
(1) any Investment in us or in any of our Restricted Subsidiaries;
(2) any Investment in Cash Equivalents;
(3) any Investment by us or any of our Restricted Subsidiaries in a
Person, if as a result of such Investment:
(a) such Person becomes our Restricted Subsidiary; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets
to, or is liquidated into, us or our Restricted Subsidiary;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales" or any
disposition of assets or rights not constituting an Asset Sale by
reason of the $2.0 million threshold contained in the definition
thereof;
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(5) any Investment made solely in exchange for the issuance of our
Equity Interests (other than Disqualified Stock) or with the cash or
property received from and within 90 days of issuance of our Equity
Interests (other than Disqualified Stock); provided that such
Investments and/or cash or property are excluded from the
calculation of clause (3)(b) of the second clause (3) of the first
paragraph under the caption "--Restricted Payments";
(6) any Investments in securities of Persons received in settlement of
claims or pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of such Person;
(7) Investments of the type giving rise to Interest Hedging Obligations
and Currency Hedging Obligations;
(8) (a) loans and advances to our and our Restricted Subsidiaries'
employees and officers, (b) extensions of credit to franchisees, (c)
leases of real property, equipment or other assets, and (d) the
licensing or contribution of intellectual property in connection
with joint marketing arrangements, in each case in the ordinary
course of business;
(9) guarantees of Indebtedness of third parties; provided that such
Indebtedness is permitted to be incurred under the covenant
described above under the caption "Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(10) other Investments having an aggregate fair market value (measured on
the date each such Investment was made and without giving effect to
subsequent changes in value) when taken together with all other
Investments made pursuant to this clause (10) that are at the time
outstanding not to exceed $20.0 million.
"Permitted Liens" means:
(1) Liens on our assets and the assets of our Restricted Subsidiaries
securing our and our Restricted Subsidiaries' Indebtedness and other
Obligations under Credit Facilities that were permitted by the terms
of the supplemental indenture to be incurred;
(2) Liens in favor of us or a Subsidiary Guarantor;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with us or any of our Restricted
Subsidiaries or becomes a Restricted Subsidiary of us or of one of
our Restricted Subsidiaries; provided that such Liens were not
created in contemplation of such merger or consolidation or
acquisition and do not extend to any assets other than those of the
Person so merged or consolidated or acquired;
(4) Liens on property existing at the time of acquisition of the
property by us or any of our Restricted Subsidiaries, provided that
such Liens were not created in contemplation of such acquisition;
(5) Liens securing Permitted Refinancing Indebtedness which is incurred
to Refinance any Indebtedness which has been secured by a Lien
permitted under the indenture and which has been incurred in
accordance with the provisions of the indenture; provided that such
Liens (A) are not materially less favorable to the Holders and are
not materially more favorable to the lienholders with respect to
such Liens than the Liens in respect of the Indebtedness being
Refinanced and (B) do not extend to or cover any of our or our
Restricted Subsidiaries' property or assets not securing the
Indebtedness Refinanced;
(6) Liens to secure Indebtedness (a) of Foreign Subsidiaries permitted
by clause (9) of the second paragraph of "--Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock," that do
not extend to any property or assets other than property or assets
of Foreign Subsidiaries, (b) permitted under clauses (4) and (8) of
the second paragraph of the caption "--Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock" covering, in the
case of clause (4), only the assets acquired, constructed or
improved with the proceeds of or as a consequence of such
Indebtedness or, in the case of clause (8), only the assets leased
under such Capital Lease Obligation, (c) permitted under clause (14)
of the second paragraph of "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock" and (d) of the type
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described under clause (4) or (8) of the second paragraph of the
caption "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock" above, provided that such Indebtedness
is incurred under the first paragraph of such caption, and provided,
further, that such Liens do not extend to any property or assets
other than those acquired, constructed or improved with the proceeds
of or as a consequence of such Indebtedness or leased under the
related Capital Lease Obligation, as applicable;
(7) Liens securing Indebtedness which, when the Indebtedness secured by
such Liens is added to all of our and our Restricted Subsidiaries'
Indebtedness secured by Liens and not listed in clauses (1) through
(6) above and (8) through (24) below, does not exceed 2.0% of our
and our Restricted Subsidiaries' Consolidated Assets;
(8) Liens existing on the date of the supplemental indenture and any
extensions, renewals or replacements thereof that do not extend to
any property or assets other than the property or assets encumbered
by the predecessor Lien;
(9) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings;
(10) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed
by law incurred in the ordinary course of business for sums not yet
delinquent for a period of more than 60 days or being contested in
good faith;
(11) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and
other types of social security or similar obligations, including any
Lien securing letters of credit issued in the ordinary course of
business consistent with past practice in connection therewith, or
to secure the performance of tenders, statutory obligations, surety
and appeal bonds, bids, leases, government contracts, performance
and return-of-money bonds and other similar obligations (exclusive
of obligations for the payment of borrowed money);
(12) judgment Liens arising out of a judgment not giving rise to an Event
of Default;
(13) easements, rights-of-way, zoning restrictions, minor defects or
irregularities in title and other similar charges or encumbrances in
respect of real property not interfering in any material respect
with our or our Restricted Subsidiaries' ordinary conduct of
business;
(14) any interest or title of a lessor under any lease, whether
characterized as capital or operating; provided that such Liens do
not extend to any property or assets which is not leased property
subject to such lease;
(15) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such
Person to facilitate the purchase, shipment or storage of such
inventory or other goods;
(16) Liens securing reimbursement obligations with respect to letters of
credit which encumber documents and other property relating to such
letters of credit and products and proceeds thereof;
(17) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of us
or any of our Restricted Subsidiaries, including rights of offset
and set-off;
(18) Liens securing Interest Hedging Obligations and Currency Hedging
Obligations;
(19) leases or subleases granted to others not interfering in any
material respect with the business of us or our Restricted
Subsidiaries;
(20) Liens arising out of consignment or similar arrangements for the
sale of goods entered into by us or any of our Restricted
Subsidiaries in the ordinary course of business;
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(21) Liens (including extensions, renewals, and replacements thereof)
upon property acquired (the "Acquired Property") after the Closing
Date; provided that (A) any such Lien is created solely for the
purpose of securing Indebtedness representing or issued to finance,
refund or refinance the cost of the Acquired Property, (B) the
principal amount of the Indebtedness secured by such Lien does not
exceed 100% of the cost of the Acquired Property, (C) such Lien does
not extend to or cover any property other than the Acquired Property
and (D) the issuance of the Indebtedness to purchase the Acquired
Property is permitted under the indenture;
(22) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of custom duties in connection with
importation of goods;
(23) Liens encumbering initial deposits and margin deposits, and other
Liens incurred in the ordinary course of business and that are
within the general parameters customary in the industry; and
(24) Liens arising from filing Uniform Commercial Code financing
statements regarding leases.
"Permitted Refinancing Indebtedness" means any of our or any of our
Restricted Subsidiaries' Indebtedness issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund ("Refinance" with the terms "Refinanced" and "Refinancing" having
meanings correlative to the foregoing) our or any of our Restricted
Subsidiaries' other Indebtedness (other than intercompany Indebtedness);
provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal
amount (or accreted value, if applicable) of the Indebtedness being
Refinanced (plus all accrued interest on the Indebtedness and the
amount of all expenses and premiums incurred in connection with such
Refinancing);
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life
to Maturity of, the Indebtedness being Refinanced;
(3) if the Indebtedness being Refinanced is subordinated in right of
payment to the notes, such Permitted Refinancing Indebtedness is
subordinated in right of payment to the notes on terms at least as
favorable to the Holders of notes as those contained in the
documentation governing the Indebtedness being Refinanced;
(4) if the Indebtedness being Refinanced is not Indebtedness of our
Restricted Subsidiary such Permitted Refinancing Indebtedness is
incurred by us; and
(5) such Permitted Refinancing Indebtedness is incurred no more than 90
days prior to the application of the proceeds to Refinance the
Indebtedness being Refinanced.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Qualified Consideration" with respect to any Asset Sale means (1) cash, (2)
Cash Equivalents, (3) any liabilities, as shown on the most recent
consolidated balance sheet of us and our Restricted Subsidiaries (other than
contingent liabilities and liabilities that are by their terms subordinated to
the notes) that are assumed by the transferee of the subject assets or rights
pursuant to a customary novation agreement that releases us or the applicable
Restricted Subsidiary from further liability, (4) any securities, notes or
other obligations received by us or a Restricted Subsidiary from such
transferee that are converted by us or such Restricted Subsidiary into cash
within 90 days of receipt thereof, and (5) assets (including Capital Stock in
a person engaged in a Permitted Business constituting at least a majority of
such person's Voting Stock) or rights of a kind used or usable in a Permitted
Business.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
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"Significant Subsidiary" means any Restricted Subsidiary (but excluding any
Unrestricted Subsidiaries that are Subsidiaries of such Restricted Subsidiary)
that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation
is in effect on the date of the supplemental indenture.
"Standard & Poor's" means Standard & Poor's Ratings Group a division of
McGraw Hill, Inc. and its successors.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subordinated Debt" means any Indebtedness that is subordinated to the notes
pursuant to the terms of a written agreement binding upon the holders thereof.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock
entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees of the
corporation, association or other business entity is at the time
owned or Controlled, directly or indirectly, by that Person or one
or more of the other Subsidiaries of that Person (or a combination
thereof); and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are that Person or one or
more Subsidiaries of that Person (or any combination thereof).
"Unrestricted Subsidiary" means any of our Subsidiaries that is designated
by our Board of Directors as an Unrestricted Subsidiary pursuant to a
resolution of our Board of Directors in accordance with the covenant described
above under the caption "Certain Covenants--Designation of Restricted and
Unrestricted Subsidiaries", together with any Subsidiaries of such
Unrestricted Subsidiary.
Any designation of a Subsidiary as an Unrestricted Subsidiary will be
evidenced to the trustee by filing with the trustee a certified copy of the
Board Resolution giving effect to such designation and an officers'
certificate certifying that such designation was permitted by the covenant
described above under the caption "Certain Covenants--Designation of
Restricted and Unrestricted Subsidiaries".
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or
other required payments of principal, including payment at final
maturity, in respect of the Indebtedness, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any specified Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares)
will at the time be owned by such Person, by one or more Wholly Owned
Restricted Subsidiaries of such Person or by such Person and one or more
Wholly Owned Restricted Subsidiaries of such Person.
S-66
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material United States federal income
tax consequences and, in the case of a holder that is a non-U.S. holder (as
defined below), the United States federal estate tax consequences of
purchasing, owning and disposing of the notes. This summary applies to you
only if you are the initial holder of the notes and you acquire the notes for
a price equal to the issue price of the notes. The issue price of the notes is
the first price at which a substantial amount of the notes is sold other than
to bond houses, brokers or similar persons or organizations acting in the
capacity of underwriters, placement agents or wholesalers.
This summary deals only with notes held as capital assets (generally,
investment property) and does not deal with special tax situations such as:
o dealers in securities or currencies;
o traders in securities;
o United States holders (as defined below) whose functional currency is not
the United States dollar;
o persons holding notes as part of a hedge, straddle, conversion or other
"synthetic security" or integrated transaction;
o certain United States expatriates;
o financial institutions;
o insurance companies;
o entities that are tax-exempt for United States federal income tax
purposes; and
o partnerships or other pass-through entities.
This summary is included for general information only and does not discuss
all of the aspects of United States federal income and estate taxation that
may be relevant to you in light of your particular investment or other
circumstances. In addition, this summary does not discuss any United States
state or local income or foreign income or other tax consequences. This
summary is based on United States federal income tax law, including the
provisions of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), Treasury regulations, administrative rulings and judicial
authority, all as in effect as of the date of this prospectus supplement.
Subsequent developments in United States federal income tax law, including
changes in law or differing interpretations, which may be applied
retroactively, could have a material effect on the United States federal
income tax consequences of purchasing, owning and disposing of notes as set
forth in this summary. Before you purchase notes, you should consult your own
tax advisor regarding the particular United States federal, state and local
and foreign income and other tax consequences of acquiring, owning and
disposing of the notes that may be applicable to you.
United States Holders
The following summary applies to you only if you are a United States holder
(as defined below).
Definition of a United States Holder
A "United States holder" is a beneficial owner of a note or notes who or
which is for United States federal income tax purposes:
o an individual citizen or resident of the United States;
o a corporation or partnership (or other entity classified as a corporation
or partnership for these purposes) created or organized in or under the
laws of the United States or of any political subdivision of the United
States, including any state;
o an estate, the income of which is subject to United States federal income
taxation regardless of the source of that income; or
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o a trust, if, in general, a United States court is able to exercise
primary supervision over the trust's administration and one or more
United States persons (within the meaning of the Internal Revenue Code)
have the authority to control all of the trust's substantial decisions.
Payments of Interest
Interest on your notes will be taxed as ordinary interest income. In
addition:
o if you use the cash method of accounting for United States federal income
tax purposes, you will have to include the interest on your notes in your
gross income at the time you receive the interest; and
o if you use the accrual method of accounting for United States federal
income tax purposes, you will have to include the interest on your notes
in your gross income at the time the interest accrues.
Sale or Other Disposition of Notes
Your tax basis in your notes generally will be their cost. When you sell or
otherwise dispose of your notes, you generally will recognize taxable gain or
loss equal to the difference, if any, between:
o the amount realized on the sale or other disposition (less any amount
attributable to accrued interest, which will be taxable in the manner
described under "--Payments of Interest"); and
o your tax basis in the notes.
Your gain or loss generally will be capital gain or loss. This capital gain
or loss will be long-term capital gain or loss if at the time of the sale or
other disposition you have held the notes for more than one year. Subject to
limited exceptions, your capital losses cannot be used to offset your ordinary
income. If you are a non-corporate United States holder, your long-term
capital gain generally will be subject to a maximum tax rate of 20%.
Information Reporting and Backup Withholding
Information reporting requirements apply to interest and principal payments
and to the proceeds of sales before maturity. Such amounts generally must be
reported to the Internal Revenue Service.
In general, "backup withholding" may apply:
o to any payments made to you of principal of and interest on your notes,
and
o to payment of the proceeds of a sale or other disposition of your notes
before maturity,
if you are a non-corporate United States holder and fail to provide a correct
taxpayer identification number or otherwise comply with applicable
requirements of the backup withholding rules.
The backup withholding tax is not an additional tax and may be credited
against your United States federal income tax liability, provided that the
required information is provided to the Internal Revenue Service.
Non-U.S. Holders
The following summary applies to you if you are a beneficial owner of a note
who or which is not a United States holder (as defined above) (a "non-U.S.
holder"). An individual may, subject to exceptions, be deemed to be a resident
alien, as opposed to a non-resident alien, by, among other ways, being present
in the United States:
o on at least 31 days in the calendar year, and
o for an aggregate of at least 183 days during a three-year period ending
in the current calendar year, counting for such purposes all of the days
present in the current year, one-third of the days present in the
immediately preceding year and one-sixth of the days present in the
second preceding year.
Resident aliens are subject to United States federal income tax as if they
were United States citizens.
S-68
United States Federal Withholding Tax
Under current United States federal income tax laws, and subject to the
discussion below, United States federal withholding tax will not apply to
payments by us or our paying agent (in its capacity as such) of principal of
and interest on your notes under the "portfolio interest" exception of the
Internal Revenue Code, provided that in the case of interest:
o you do not, directly or indirectly, actually or constructively, own ten
percent or more of the total combined voting power of all classes of our
stock entitled to vote;
o you are not a controlled foreign corporation for United States federal
income tax purposes that is related, directly or indirectly, to us
through sufficient stock ownership (as provided in the Internal Revenue
Code);
o such interest is not effectively connected with your conduct of a United
States trade or business; and
o you provide a signed, written statement, under penalties of perjury,
which can reliably be related to you, certifying that you are not a
United States person within the meaning of the Internal Revenue Code and
providing your name and address to:
(A) us or our paying agent; or
(B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of
its trade or business and holds your notes on your behalf and that
certifies to us or our paying agent under penalties of perjury that
it, or the bank or financial institution between it and you, has
received from you your signed, written statement and provides us or
our paying agent with a copy of this statement.
Recently finalized Treasury regulations provide alternative methods for
satisfying the certification requirement described in this section.
If you are a foreign partnership or a foreign trust, you should consult your
own tax advisor regarding your status under these Treasury regulations and the
certification requirements applicable to you.
United States Federal Income Tax
Except for the possible application of United States withholding tax (see
"--United States Federal Withholding Tax" above) and backup withholding tax
(see "--Backup Withholding and Information Reporting" below), you generally
will not have to pay United States federal income tax on payments of principal
of and interest on your notes, or on any gain or income realized from the
sale, redemption, retirement at maturity or other disposition of your notes
(provided that, in the case of proceeds representing accrued interest, the
conditions described in "--United States Federal Withholding Tax" are met)
unless:
o in the case of gain, you are an individual who is present in the United
States for 183 days or more during the taxable year of the sale or other
disposition of your notes and specific other conditions are met; or
o the income or gain is effectively connected with your conduct of a United
States trade or business, or, if an income tax treaty applies, is
generally attributable to a United States "permanent establishment"
maintained by you.
If you are engaged in a trade or business in the United States and interest,
gain or any other income in respect of your notes is effectively connected
with the conduct of your trade or business, or, if an income tax treaty
applies, you maintain a United States "permanent establishment" to which the
interest, gain or other income is generally attributable, you may be subject
to United States income tax on a net basis on the interest, gain or income
(although interest is exempt from the withholding tax discussed in the
preceding paragraphs provided that you provide a properly executed applicable
Internal Revenue Service form on or before any payment date to claim the
exemption).
In addition, if you are a foreign corporation, you may be subject to a
branch profits tax equal to 30% of your effectively connected earnings and
profits for the taxable year, as adjusted for certain items, unless a
S-69
lower rate applies to you under a United States income tax treaty with your
country of residence. For this purpose, you must include interest, gain or
income on your notes in the earnings and profits subject to the branch tax if
these amounts are effectively connected with the conduct of your United States
trade or business.
United States Federal Estate Tax
If you are an individual and are not a United States citizen or a resident
of the United States (as specially defined for United States federal estate
tax purposes) at the time of your death, your notes will generally not be
subject to the United States federal estate tax, unless, at the time of your
death:
o you directly or indirectly, actually or constructively, own ten percent
or more of the total combined voting power of all classes of our stock
entitled to vote; or
o your interest in the notes is effectively connected with your conduct of
a United States trade or business.
Backup Withholding and Information Reporting
Under current Treasury regulations, backup withholding and information
reporting will not apply to payments made by us or our paying agent (in its
capacity as such) to you if you have provided the required certification that
you are a non-U.S. holder as described in "--United States Federal Withholding
Tax" above, and provided that neither we nor our paying agent has actual
knowledge that you are a United States holder (as described in "--United
States Holders" above). We or our paying agent may, however, report payments
of interest on the notes.
The gross proceeds from the disposition of your notes may be subject to
information reporting and backup withholding tax. If you sell your notes
outside the United States through a non-U.S. office of a non-U.S. broker and
the sales proceeds are paid to you outside the United States, then the U.S.
backup withholding and information reporting requirements generally will not
apply to that payment. However, U.S. information reporting, but not backup
withholding, will apply to a payment of sales proceeds, even if that payment
is made outside the United States, if you sell your notes though a non-U.S.
office of a broker that:
o is a United States person (as defined in the Internal Revenue Code);
o derives 50% or more of its gross income in specific periods from the
conduct of a trade or business in the United States;
o is a "controlled foreign corporation" for U.S. federal income tax
purposes; or
o is a foreign partnership, if at any time during its tax year
-- one or more of its partners are U.S. persons who in the aggregate hold
more than 50% of the income or capital interests in the partnership, or
-- the foreign partnership is engaged in a U.S. trade or business,
unless the broker has documentary evidence in its files that you are a non-
U.S. person and certain other conditions are met or you otherwise establish an
exemption. If you receive payments of the proceeds of a sale of your notes to
or through a U.S. office of a broker, the payment is subject to both U.S.
backup withholding and information reporting unless you provide a Form W-8BEN
certifying that you are a non-U.S. person or you otherwise establish an
exemption.
You should consult your own tax advisor regarding application of backup
withholding in your particular circumstances and the availability of and
procedure for obtaining an exemption from backup withholding under current
Treasury regulations. Any amounts withheld under the backup withholding rules
from a payment to you will be allowed as a refund or credit against your
United States federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
S-70
UNDERWRITING
We intend to offer the notes through the underwriters named below. We have
entered into an underwriting agreement, dated December 14, 2001, with the
underwriters pursuant to which, on the terms and subject to the conditions of
the underwriting agreement, we have agreed to sell to the underwriters, and
the underwriters severally have agreed to purchase from us, the principal
amount of notes listed opposite their names below:
Principal Amount
Underwriter of Notes
----------- ----------------
Lehman Brothers Inc........................... $150,000,000
Goldman, Sachs & Co........................... 68,750,000
Morgan Stanley & Co. Incorporated............. 45,000,000
Scotia Capital (USA) Inc...................... 11,250,000
------------
Total ...................................... $275,000,000
============
The underwriting agreement provides that the obligation of the underwriters
to purchase the notes included in this offering is subject to customary
conditions. The underwriters have agreed to purchase all of the notes sold
pursuant to the underwriting agreement if any of these notes are purchased. If
an underwriter defaults, the underwriting agreement provides that the purchase
commitments of the nondefaulting underwriters may be increased or the
underwriting agreement may be terminated.
The underwriters initially propose to offer part of the notes to the public
at the public offering price set forth on the cover page of this prospectus
supplement and in part to certain dealers at a price that represents a
concession not in excess of .25% of the principal amount of the notes. The
underwriters may allow, and such dealers may reallow, a concession not in
excess of .12% of the principal amount of the notes to certain other dealers.
After the initial offering of the notes, the offering price and other selling
terms may from time to time be varied by the underwriters.
In connection with this offering, the underwriters may purchase and sell the
notes in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover short positions created by the
underwriters in connection with the offering. Stabilizing transactions consist
of certain bids or purchases for the purpose of preventing or retarding a
decline in the market price of the notes, and short positions created by the
underwriters involve the sale by the underwriters of a greater aggregate
principal amount of notes than they are required to purchase from us. The
underwriters also may impose a penalty bid, whereby selling concessions
allowed to broker-dealers in respect of the notes sold in the offering may be
reclaimed by the underwriters if such notes are repurchased by the
underwriters in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the notes, which
may be higher than the price that might otherwise prevail in the open market,
and these activities, if commenced, may be discontinued at any time. These
transactions may be effected in the over-the-counter market or otherwise.
The notes are a new issue of securities with no established trading market.
We have been advised by the underwriters that they intend to make a market in
the notes, but they are not obligated to do so and may discontinue any market
making at any time without notice. We cannot assure you as to the liquidity of
the trading market for the notes. The notes will not be listed on any
securities exchange.
It is expected that delivery of the notes will be made against payment
therefor on or about the delivery date specified on the cover page of this
prospectus supplement, which will be the fourth business day following the
date of pricing of the notes (this settlement cycle being referred to as T+4).
Under Rule 15c6-1 of the Securities and Exchange Commission under the
Securities Exchange Act of 1934, trades in the secondary market generally are
required to settle in three business days, unless the parties to the trade
expressly agree otherwise. Accordingly, purchasers who wish to trade notes on
the date of pricing will be required, by virtue of the fact that the notes
initially will settle in T+4, to specify an alternate settlement cycle at the
time of any trade to prevent a failed settlement.
S-71
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended. We have also agreed, during the period ending 90 days from the date
of this prospectus supplement, not to issue, sell, offer to sell, grant any
option for the sale of, or otherwise dispose of any debt securities (except
for the notes) with substantially similar terms to the notes.
In the ordinary course of its business, the underwriters and their
respective affiliates have engaged, and may in the future engage, in
commercial banking and/or investment banking transactions with us and our
affiliates. They have received customary fees and commissions for these
transactions. The Bank of Nova Scotia, one of the lenders under our secured
revolving credit facility, is an affiliate of Scotia Capital (USA) Inc. In
addition, Lehman Brothers is acting as dealer manager in connection with our
tender offer for the 2004 Notes.
You should read "Plan of Distribution" in the accompanying prospectus for
further information regarding the distribution of the notes.
LEGAL MATTERS
Certain legal matters relating to the notes will be passed upon for A&P by
Cahill Gordon & Reindel, New York, New York. Certain legal matters relating to
the notes will be passed upon for the underwriters by Milbank, Tweed, Hadley &
McCloy LLP, New York, New York.
EXPERTS
The consolidated financial statements of The Great Atlantic & Pacific Tea
Company, Inc. and its consolidated subsidiaries as of February 24, 2001 and
February 26, 2000 and for the fiscal years ended February 24, 2001, February
26, 2000 and February 27, 1999 included elsewhere in the prospectus supplement
and incorporated by reference in the accompanying prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
thereon included elsewhere in the prospectus supplement and incorporated by
reference in the accompanying prospectus. These consolidated financial
statements have been so included in the prospectus supplement and incorporated
by reference in the accompanying prospectus in reliance upon such report given
upon their authority as experts in accounting and auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Reference is made to the information under "Incorporation of Certain
Documents by Reference" in the accompanying prospectus. All documents filed
under the Exchange Act with the Securities and Exchange Commission prior to
February 24, 2001 and incorporated by reference in the accompanying prospectus
have been superseded by the documents filed under the Exchange Act with the
Securities and Exchange Commission on or after February 24, 2001 and shall not
be deemed to constitute a part of this prospectus supplement.
S-72
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Unaudited Consolidated Financial Statements for the Fiscal Quarter Ended
September 8, 2001
Statements of Consolidated Operations for the 12 and 28 Weeks Ended
September 8, 2001 and September 9, 2000 .............................. F-2
Statements of Consolidated Stockholders' Equity and Comprehensive
(Loss) Income for the 12 and 28 Weeks Ended September 8, 2001 and
September 9, 2000 .................................................... F-3
Consolidated Balance Sheets as of September 8, 2001 and February 24,
2001 ................................................................. F-4
Statements of Consolidated Cash Flows for the 28 Weeks Ended September
8, 2001 and September 9, 2000 ........................................ F-5
Notes to Consolidated Financial Statements ............................. F-6
Audited Consolidated Financial Statements for the Three Fiscal Years
Ended February 24, 2001
Independent Auditors' Report ........................................... F-12
Statements of Consolidated Operations for the 52 Weeks Ended February
24, 2001, February 26, 2000 and February 27, 1999 .................... F-13
Statements of Consolidated Stockholders' Equity and Comprehensive
(Loss) Income for the 52 Weeks Ended February 24, 2001, February 26,
2000 and February 27, 1999 ........................................... F-14
Consolidated Balance Sheets as of February 24, 2001 and February 26,
2000 ................................................................. F-15
Statements of Consolidated Cash Flows for the 52 Weeks Ended February
24, 2001, February 26, 2000 and February 27, 1999 .................... F-16
Notes to Consolidated Financial Statements ............................. F-17
F-1
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
--------------------------- ---------------------------
September 8, September 9, September 8, September 9,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales ............................................................... $ 2,547,590 $ 2,439,534 $ 5,935,884 $ 5,639,354
Cost of merchandise sold ............................................ (1,809,093) (1,735,281) (4,236,365) (4,015,756)
----------- ----------- ----------- -----------
Gross margin ........................................................ 738,497 704,253 1,699,519 1,623,598
Store operating, general and administrative expense ................. (725,872) (691,844) (1,669,352) (1,573,376)
----------- ----------- ----------- -----------
Income from operations .............................................. 12,625 12,409 30,167 50,222
Interest expense .................................................... (19,884) (22,132) (48,944) (51,068)
Interest income ..................................................... 1,892 1,426 3,734 3,290
----------- ----------- ----------- -----------
(Loss) income before income taxes ................................... (5,367) (8,297) (15,043) 2,444
Benefit (provision) for income taxes ................................ 2,136 2,923 4,673 (2,234)
----------- ----------- ----------- -----------
Net (loss) income ................................................... $ (3,231) $ (5,374) $ (10,370) $ 210
=========== =========== =========== ===========
(Loss) earnings per share:
Net (loss) income per share - basic and diluted ..................... $ (0.08) $ (0.14) $ (0.27) $ 0.01
=========== =========== =========== ===========
Weighted average number of common shares outstanding - basic and
diluted *.......................................................... 38,347,216 38,347,216 38,347,216 38,347,216
=========== =========== =========== ===========
- ---------------
* Common share equivalents for 2001 and 2000 have been excluded because they
are either antidilutive or zero.
See Notes to Consolidated Financial Statements.
F-2
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY AND
COMPREHENSIVE (LOSS) INCOME
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Unamortized Accumulated
Additional Value of Other Total
Common Paid-in Restricted Retained Comprehensive Stockholders'
Stock Capital Stock Grant Earnings (Loss)/Income Equity
------- ---------- ----------- -------- ------------- -------------
FY 2001 - 28 Week Period
- --------------------------
Balance at beginning of period
38,347,216 shares............................. $38,347 $456,470 $ -- $375,288 $(72,808) $797,297
Net loss ....................................... (10,370) (10,370)
Other comprehensive income:
Foreign currency translation
adjustment................................... (274) (274)
------- -------- ----- -------- -------- --------
Balance at end of period ....................... $38,347 $456,470 $ -- $364,918 $(73,082) $786,653
======= ======== ===== ======== ======== ========
FY 2000 - 28 Week Period
- --------------------------
Balance at beginning of period
38,367,216 shares............................. $38,367 $457,101 $(441) $411,861 $(60,696) $846,192
Net income ..................................... 210 210
Other comprehensive income:
Foreign currency translation
adjustment................................... (2,500) (2,500)
Minimum pension
liability adjustment ......................... 2,682 2,682
Reversal of restricted stock grants ............ (20) (631) 441 (210)
Cash dividends ($.10 per share) ................ (7,670) (7,670)
------- -------- ----- -------- -------- --------
Balance at end of period ....................... $38,347 $456,470 $ -- $404,401 $(60,514) $838,704
======= ======== ===== ======== ======== ========
Comprehensive (Loss) Income
- ---------------------------
12 Weeks Ended 28 Weeks Ended
--------------------------- ---------------------------
September 8, September 9, September 8, September 9,
2001 2000 2001 2000
-------- -------- --------- -------
Net (loss) income ................................................... $(3,231) $(5,374) $(10,370) $ 210
Foreign currency translation adjustment ............................. (6,702) (1,221) (274) (2,500)
Minimum pension liability adjustment ................................ -- -- -- 2,682
-------- -------- --------- -------
Total comprehensive (loss) income ................................... $(9,933) $(6,595) $(10,644) $ 392
======== ======== ========= =======
See Notes to Consolidated Financial Statements.
F-3
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts)
September 8, February 24,
2001 2001
---------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and short-term investments............... $ 159,686 $ 131,550
Accounts receivable........................... 183,903 183,382
Inventories................................... 738,474 783,758
Prepaid expenses and other current assets..... 104,893 103,164
---------- ----------
Total current assets ........................ 1,186,956 1,201,854
---------- ----------
Property:
Property owned .............................. 1,746,923 1,805,255
Property leased under capital leases ........ 81,115 84,758
---------- ----------
Property--net................................. 1,828,038 1,890,013
Other assets.................................. 191,524 217,936
---------- ----------
Total assets .................................... $3,206,518 $3,309,803
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............. $ 4,076 $ 6,195
Current portion of obligations under capital
leases...................................... 11,300 11,634
Accounts payable.............................. 538,133 566,482
Book overdrafts............................... 145,153 108,448
Accrued salaries, wages and benefits.......... 166,150 158,450
Accrued taxes................................. 69,231 62,169
Other accruals................................ 215,207 194,106
---------- ----------
Total current liabilities ................... 1,149,250 1,107,484
---------- ----------
Long-term debt ................................. 800,841 915,321
Long-term obligations under capital leases ..... 99,726 106,797
Other non-current liabilities .................. 370,048 382,904
---------- ----------
Total liabilities ............................... 2,419,865 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--38,347,216 shares at
September 8, 2001 and February 24, 2001,
respectively................................. 38,347 38,347
Additional paid-in capital.................... 456,470 456,470
Accumulated other comprehensive loss.......... (73,082) (72,808)
Retained earnings............................. 364,918 375,288
---------- ----------
Total stockholders' equity ...................... 786,653 797,297
---------- ----------
Total liabilities and stockholders' equity ...... $3,206,518 $3,309,803
========== ==========
See Notes to Consolidated Financial Statements.
F-4
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)
(Unaudited)
28 Weeks Ended
-------------------------------------
September 8, 2001 September 9, 2000
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ..................... $ (10,370) $ 210
Adjustments to reconcile net (loss)
income to cash provided
by operating activities:
Store/facilities exit charge
reversal............................ -- (3,061)
Environmental charge................. -- 3,029
Depreciation and amortization........ 143,256 135,451
Deferred income tax (benefit)
provision........................... (6,617) 376
Loss (gain) on disposal of owned
property............................ 9,015 (1,648)
Other changes in assets and
liabilities:
(Increase) decrease in receivables... (1,229) 33,289
Decrease (increase) in inventories... 43,021 (12,344)
(Increase) in prepaid expenses and
other current assets................ (15,171) (2,413)
Decrease (increase) in other assets.. 6,627 (2,075)
(Decrease) in accounts payable...... (25,337) (13,450)
Increase in accrued salaries, wages
and benefits........................ 8,260 6,165
Increase in accrued taxes............ 7,123 7,974
(Decrease) in other accruals and
other liabilities................... (572) (33,450)
Other operating activities, net...... 6,256 80
--------- ---------
Net cash provided by operating
activities............................ 164,262 118,133
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property ............. (123,481) (241,643)
Proceeds from disposal of property .... 73,963 16,538
--------- ---------
Net cash used in investing activities .. (49,518) (225,105)
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt ............ (5,000) 18,000
Proceeds under revolving lines of
credit................................ 827,506 90,000
Payments on revolving lines of credit (917,594) (45,000)
Proceeds from long-term borrowings .... 852 19,454
Payments on long-term borrowings ...... (22,362) (2,086)
Principal payments on capital leases .. (6,338) (5,973)
Increase in book overdrafts ........... 36,937 12,913
Cash dividends ........................ -- (7,670)
--------- ---------
Net cash provided by financing
activities............................ (85,999) 79,638
Effect of exchange rate changes on
cash and short-term investments....... (609) (875)
--------- ---------
Net increase (decrease) in cash and
short-term investments................ 28,136 (28,209)
Cash and short-term investments at
beginning of period................... 131,550 124,603
--------- ---------
Cash and short-term investments at end
of period............................. $ 159,686 $ 96,394
========= =========
See Notes to Consolidated Financial Statements.
F-5
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements for the 12 and 28 week periods ended
September 8, 2001 and September 9, 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 store and facilities exit costs and the
supply chain and business process strategic initiatives 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 provision/benefit recorded for the 28 week period 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 28 weeks ended September 8, 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 $5.9 million or 39.0% of the loss before income taxes.
During the quarter ended September 8, 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 had no impact
on the financial statements for the 12 and 28 weeks ended September 8, 2001.
3. Wholesale Franchise Business
As of September 8, 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 $154 million and $146 million for the second quarters of
fiscal 2001 and 2000, respectively, and $362 million and $334 million for the
28 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
$2.5 million and $3.7 million, are included in accounts receivable at
September 8, 2001 and February 24, 2001, respectively. The long-term portion
of the inventory notes and equipment leases amounting to approximately $48.0
million and $55.3 million are included in other assets at September 8, 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.
F-6
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 not determined the
impact, if any, the adoption of this statement will have 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. Store and Facilities Exit Costs
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 (closure of 22 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 $28.5 million of the total net severance charges from the
time of the original charges through the September 8, 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.
F-7
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Store and Facilities Exit Costs -- (Continued)
The following reconciliation summarizes the activity related to the
aforementioned charges since the beginning of fiscal 2000:
Severance
Store and Facilities
(Dollars in thousands) 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) .................................................................... 2,331 -- -- 2,331
Utilization (2) ................................................................. (11,909) (320) -- (12,229)
-------- ------- ------- --------
Reserve Balance at September 8, 2001 ............................................ $ 73,283 $ 2,401 $ -- $ 75,684
======== ======= ======= ========
(1) The addition to store occupancy of $2.3 million during the 28 weeks ended
September 8, 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 $11.9 million represents lease and other
occupancy payments made during the 28 weeks ended September 8, 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 $75.7 million as of September 8, 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 September 8, 2001, approximately $12.3 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 28
weeks ended September 8, 2001 and September 9, 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:
12 Weeks Ended 28 Weeks Ended
--------------------------- ---------------------------
September 8, September 9, September 8, September 9,
2001 2000 2001 2000
------------ ------------ ------------ ------------
(In thousands)
Sales ............................................................... $ 16 $163 $ 197 $377
==== ==== ===== ====
Operating Loss ...................................................... $(62) $ (4) $(108) $(71)
==== ==== ===== ====
F-8
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
operating profit.
Interim information on segments is as follows:
12 Weeks Ended 28 Weeks Ended
--------------------------- ---------------------------
September 8, September 9, September 8, September 9,
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Dollars in thousands)
Sales
U.S. Retail ........................................................ $1,977,265 $1,899,170 $4,607,193 $4,385,014
Canada Retail ...................................................... 416,431 394,362 967,008 920,078
Canada Wholesale ................................................... 153,894 146,002 361,683 334,262
---------- ---------- ---------- ----------
Total Company..................................................... $2,547,590 $2,439,534 $5,935,884 $5,639,354
========== ========== ========== ==========
Depreciation and amortization
U.S. Retail ........................................................ $ 52,728 $ 51,281 $ 124,388 $ 118,387
Canada Retail ...................................................... 8,323 7,522 18,868 17,064
Canada Wholesale ................................................... -- -- -- --
---------- ---------- ---------- ----------
Total Company..................................................... $ 61,051 $ 58,803 $ 143,256 $ 135,451
========== ========== ========== ==========
Income from operations
U.S. Retail ........................................................ $ (1,199) $ 2,268 $ 6,361 $ 23,472
Canada Retail ...................................................... 7,881 5,812 10,026 16,127
Canada Wholesale ................................................... 5,943 4,329 13,780 10,623
---------- ---------- ---------- ----------
Total Company..................................................... $ 12,625 $ 12,409 $ 30,167 $ 50,222
========== ========== ========== ==========
(Loss) income before income taxes
U.S. Retail ........................................................ $ (18,068) $ (16,441) $ (35,915) $ (19,647)
Canada Retail ...................................................... 6,533 3,500 6,559 10,838
Canada Wholesale ................................................... 6,168 4,644 14,313 11,253
---------- ---------- ---------- ----------
Total Company..................................................... $ (5,367) $ (8,297) $ (15,043) $ 2,444
========== ========== ========== ==========
Capital expenditures
U.S. Retail ........................................................ $ 39,400 $ 82,211 $ 102,055 $ 202,889
Canada Retail ...................................................... 3,163 17,969 21,426 38,754
Canada Wholesale ................................................... -- -- -- --
---------- ---------- ---------- ----------
Total Company..................................................... $ 42,563 $ 100,180 $ 123,481 $ 241,643
========== ========== ========== ==========
F-9
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Operating Segments -- (Continued)
September 8, February 24,
2001 2001
------------ ------------
Total assets
U.S. Retail .................................... $2,616,563 $2,679,217
Canada Retail .................................. 513,555 548,801
Canada Wholesale ............................... 76,400 81,785
---------- ----------
Total Company................................. $3,206,518 $3,309,803
========== ==========
7. Supply Chain and Business Process Strategic Initiatives
On March 13, 2000, the Company announced an initiative to develop a state-
of-the-art supply and business management infrastructure.
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 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 related to software
purchases of approximately $29 million were to be repaid over the next several
months. Accordingly, as of September 8, 2001, approximately $25 million had
been repaid and $4 million was payable related to software. 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 September 8, 2001,
approximately $27 million had been funded related to hardware leases, and as a
result, approximately $15 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, the Company sold 7 additional properties and
simultaneously leased them back from the purchaser. The properties subject to
this sale had a carrying value of approximately $37 million. Net proceeds
received by the Company related to these transactions amounted to
approximately $50 million. Of the 7 properties sold, 5 were sold for a profit
resulting in a gain after deducting expenses of approximately $15 million.
This gain will be deferred and amortized over the life of the respective
leases as a reduction of rental expense. Two 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 resulting leases of the 19 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
F-10
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Sale-Leaseback Transaction -- (Continued)
accordance with SFAS No. 13, "Accounting for Leases". Future minimum lease
payments for these operating leases are as follows:
(Dollars in thousands)
Fiscal
2001 .................................................. $ 7,832
2002 .................................................. 18,795
2003 .................................................. 18,795
2004 .................................................. 18,795
2005 .................................................. 18,795
2006 and thereafter ................................... 306,189
--------
Total .............................................. $389,201
========
During the remainder of fiscal 2001, the Company expects to enter into
similar transactions with 2 other owned properties.
F-11
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of The Great Atlantic & Pacific Tea
Company, Inc.:
We have audited the accompanying consolidated balance sheets of The Great
Atlantic & Pacific Tea Company, Inc. and its subsidiary companies as of
February 24, 2001 and February 26, 2000 and the related statements of
consolidated operations, consolidated stockholders' equity and comprehensive
income (loss), and consolidated cash flows for each of the three fiscal years
in the period ended February 24, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Great Atlantic & Pacific Tea
Company, Inc. and its subsidiary companies at February 24, 2001 and February
26, 2000 and the results of their operations and their cash flows for each of
the three fiscal years in the period ended February 24, 2001 in conformity
with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Parsippany, New Jersey
April 5, 2001
F-12
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
(Dollars in thousands, except per share amounts)
52 Weeks Ended
----------------------------------------------------------
February 24, 2001 February 26, 2000 February 27, 1999
----------------- ----------------- -----------------
Sales................................................................ $10,622,866 $10,151,334 $10,179,358
Cost of merchandise sold............................................. (7,594,450) (7,243,718) (7,260,110)
----------- ----------- -----------
Gross margin......................................................... 3,028,416 2,907,616 2,919,248
Store operating, general
and administrative expense......................................... (2,978,223) (2,802,786) (3,083,639)
----------- ----------- -----------
Income (loss) from operations........................................ 50,193 104,830 (164,391)
Interest expense..................................................... (96,088) (84,045) (71,497)
Interest income...................................................... 6,222 6,218 6,604
----------- ----------- -----------
(Loss) income before income taxes.................................... (39,673) 27,003 (229,284)
Benefit from (provision for) income taxes............................ 14,605 (12,843) 162,120
----------- ----------- -----------
Net (loss) income.................................................... $ (25,068) $ 14,160 $ (67,164)
=========== =========== ===========
Net (loss) income per share--basic
and diluted........................................................ $ (0.65) $ 0.37 $ (1.75)
=========== =========== ===========
Weighted average common shares
outstanding--basic................................................. 38,347,216 38,330,379 38,273,859
=========== =========== ===========
Weighted average common shares
outstanding--diluted............................................... 38,347,216 38,415,420 38,273,859
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-13
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY AND
COMPREHENSIVE (LOSS) INCOME
(Dollars in thousands, except share amounts)
Unamortized Accumulated
Common Stock Additional value of other Total
-------------------- paid-in restricted comprehensive Retained stockholders'
Shares Amount capital stock grant (loss) income earnings equity
---------- ------- ---------- ----------- ------------- -------- -------------
Balance at 2/29/98................ 38,252,966 $38,253 $453,894 $ -- $(61,025) $495,510 $926,632
Net loss.......................... (67,164) (67,164)
Stock options exercised........... 37,750 38 1,077 1,115
Comprehensive loss................ (8,014) (8,014)
Cash dividends.................... (15,312) (15,312)
---------- ------- -------- ----- -------- -------- --------
Balance at 2/27/99................ 38,290,716 38,291 454,971 -- (69,039) 413,034 837,257
Net income........................ 14,160 14,160
Stock options exercised........... 56,500 56 1,499 1,555
Issuance of 20,000 shares of
restricted common stock........ 20,000 20 631 (651) --
Amortization of restricted stock
grant........................... 210 210
Comprehensive income.............. 8,343 8,343
Cash dividends.................... (15,333) (15,333)
---------- ------- -------- ----- -------- -------- --------
Balance at 2/26/00................ 38,367,216 38,367 457,101 (441) (60,696) 411,861 846,192
Net loss.......................... (25,068) (25,068)
Forfeiture of restricted stock
grant........................... (20,000) (20) (631) 441 (210)
Comprehensive loss................ (12,112) (12,112)
Cash dividends.................... (11,505) (11,505)
---------- ------- -------- ----- -------- -------- --------
Balance at 2/24/01................ 38,347,216 $38,347 $456,470 $ -- $(72,808) $375,288 $797,297
========== ======= ======== ===== ======== ======== ========
52 Weeks Ended
----------------------------------------------------------
February 24, 2001 February 26, 2000 February 27, 1999
----------------- ----------------- -----------------
Comprehensive (loss) income
Net (loss) income ................................ $(25,068) $14,160 $(67,164)
-------- ------- --------
Foreign currency translation adjustment ......... (14,802) 6,784 (9,936)
Minimum pension liability adjustment ............ 2,690 1,559 1,922
-------- ------- --------
Other comprehensive (loss) income ................ (12,112) 8,343 (8,014)
-------- ------- --------
Total comprehensive (loss) income ................ $(37,180) $22,503 $(75,178)
======== ======= ========
See Notes to Consolidated Financial Statements.
F-14
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
February 24, February 26,
2001 2000
------------ ------------
Assets
Current assets:
Cash and short-term investments ................ $ 131,550 $ 124,603
Accounts receivable ............................ 183,382 227,078
Inventories .................................... 783,758 791,150
Prepaid expenses and other current assets ...... 103,164 80,052
----------- -----------
Total current assets.......................... 1,201,854 1,222,883
----------- -----------
Property:
Land ........................................... 107,893 137,672
Buildings ...................................... 359,275 420,345
Equipment and leasehold improvements ........... 2,388,366 2,274,349
----------- -----------
Total--at cost................................ 2,855,534 2,832,366
Less accumulated depreciation and amortization . (1,050,279) (1,042,704)
----------- -----------
Property owned................................ 1,805,255 1,789,662
Property leased under capital leases ........... 84,758 94,146
----------- -----------
Property--net ................................... 1,890,013 1,883,808
Other assets .................................... 217,936 228,834
----------- -----------
Total assets ................................... $ 3,309,803 $ 3,335,525
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt .............. $ 6,195 $ 2,382
Current portion of obligations under capital
leases......................................... 11,634 11,327
Accounts payable ............................... 566,482 583,142
Book overdrafts ................................ 108,448 112,465
Accrued salaries, wages and benefits ........... 158,450 155,649
Accrued taxes ................................. 62,169 51,611
Other accruals ................................. 194,106 208,002
----------- -----------
Total current liabilities..................... 1,107,484 1,124,578
----------- -----------
Long-term debt .................................. 915,321 865,675
Long-term obligations under capital leases ...... 106,797 117,870
Other non-current liabilities ................... 382,904 381,210
----------- -----------
Total liabilities .............................. 2,512,506 2,489,333
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock-no par value; authorized--
3,000,000 shares; issued--none................. -- --
Common stock--$1 par value; authorized--
80,000,000 shares; issued and outstanding--
38,347,216 and 38,367,216 shares at February
24, 2001 and February 26, 2000,
respectively.................................. 38,347 38,367
Additional paid-in capital ..................... 456,470 457,101
Unamortized value of restricted stock grant .... -- (441)
Accumulated other comprehensive loss ........... (72,808) (60,696)
Retained earnings .............................. 375,288 411,861
----------- -----------
Total stockholders' equity.................... 797,297 846,192
----------- -----------
Total liabilities and stockholders' equity ..... $ 3,309,803 $ 3,335,525
=========== ===========
See Notes to Consolidated Financial Statements.
F-15
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)
52 Weeks Ended
-------------------------------------------
February 24, February 26, February 27,
2001 2000 1999
------------ ------------ ------------
Cash Flows From Operating Activities:
Net (loss) income................................................................... $ (25,068) $ 14,160 $ (67,164)
Adjustments to reconcile net (loss) income to cash provided by operating activities:
Store/Facilities exit charge and asset write-off................................. (3,104) 14,078 224,580
Environmental charge............................................................. 4,329 -- --
Depreciation and amortization.................................................... 255,771 232,712 233,663
Deferred income tax (benefit) provision.......................................... (18,136) 8,258 (165,672)
Loss (gain) on disposal of owned property and
write-down of property, net..................................................... 4,263 (2,973) 4,541
Decrease (increase) in receivables............................................... 41,085 (23,041) 19,562
(Increase) decrease in inventories............................................... (336) 60,026 34,762
Decrease in prepaid expenses and other current assets............................ 4,903 2,392 6,816
(Increase) decrease in other assets.............................................. (7,648) (16,630) 2,071
Increase in accounts payable..................................................... 5,443 16,546 122,251
Increase in accrued expenses..................................................... 13,104 4,797 2,633
(Decrease) increase in other accruals............................................ (25,644) 518 43,604
Increase in other non-current liabilities........................................ 2,353 5,432 28,203
Other, net....................................................................... 2,446 (1,615) (2,764)
--------- --------- ---------
Net cash provided by operating activities........................................... 253,761 314,660 487,086
--------- --------- ---------
Cash Flows From Investing Activities:
Expenditures for property........................................................ (415,842) (479,572) (438,345)
Proceeds from disposal of property............................................... 150,255 101,319 12,546
--------- --------- ---------
Net cash used in investing activities............................................... (265,587) (378,253) (425,799)
--------- --------- ---------
Cash Flows From Financing Activities:
Proceeds under revolving lines of credit......................................... 817,447 165,102 451,523
Payments on revolving lines of credit............................................ (602,307) (235,150) (411,632)
Proceeds from long-term borrowings............................................... 4,981 206,010 3,685
Payments on long-term borrowings................................................. (166,670) (4,975) (22,456)
Principal payments on capital leases............................................. (11,252) (11,968) (12,139)
(Decrease) increase in book overdrafts........................................... (3,298) (49,354) 12,079
Deferred financing fees.......................................................... (6,428) (6,298) --
Proceeds from stock options exercised............................................ -- 1,555 1,115
Cash dividends................................................................... (11,505) (15,333) (15,312)
--------- --------- ---------
Net cash provided by financing activities........................................... 20,968 49,589 6,863
--------- --------- ---------
Effect of exchange rate changes on cash and short-term investments.................. (2,195) 1,797 (2,277)
--------- --------- ---------
Net increase (decrease) in cash and short-term investments.......................... 6,947 (12,207) 65,873
Cash and short-term investments at beginning of year................................ 124,603 136,810 70,937
--------- --------- ---------
Cash and short-term investments at end of year...................................... $ 131,550 $ 124,603 $ 136,810
========= ========= =========
See Notes to Consolidated Financial Statements.
F-16
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts, and where noted)
Note 1--Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. The Company operates retail supermarkets
in the United States and Canada. The U.S. operations are mainly in the Eastern
part of the U.S. and certain parts of the Midwest. See the following footnotes
for additional information on the Canadian Operations: Note 4--Wholesale
Franchise Business, Note 5--Indebtedness, Note 8--Income Taxes, Note 9--
Retirement Plans and Benefits, and Note 13--Operating Segments. The principal
stockholder of the Company, Tengelmann Warenhandelsgesellschaft, owned 56.6%
of the Company's common stock as of February 24, 2001.
Fiscal Year
The Company's fiscal year ends on the last Saturday in February. Fiscal 2000
ended February 24, 2001, fiscal 1999 ended February 26, 2000 and fiscal 1998
ended February 27, 1999. Fiscal 2000, fiscal 1999 and fiscal 1998 were each
comprised of 52 weeks.
Revenue Recognition
Retail revenue is recognized at point-of-sale while wholesale revenue is
recognized in accordance with its terms, when goods are shipped.
Cash and Short-term Investments
Short-term investments that are highly liquid with an original maturity of
three months or less are included in "Cash and short-term investments" and are
deemed to be cash equivalents.
Inventories
Store inventories are valued principally at the lower of cost or market with
cost determined under the retail method. Warehouse and other inventories are
valued primarily at the lower of cost or market with cost determined on a
first-in, first-out basis. Inventories of certain acquired companies are
valued using the last-in, first-out method, which was their practice prior to
acquisition. See Note 3--Inventory for additional information regarding the
Company's use of the last-in, first-out method.
Advertising Costs
Advertising costs are expensed as incurred. The Company recorded advertising
expense of $147 million, $139 million and $136 million for fiscal 2000, 1999
and 1998, respectively.
Pre-opening Costs
The costs of opening new stores are expensed as incurred.
Software Costs
The Company capitalizes externally purchased software and amortizes it over
three years. Amortization expense for fiscal 2000, 1999 and 1998 was $1.4
million, $0.9 million and $0.8 million, respectively.
Effective February 29, 1998, the Company adopted the provisions of the
American Institute of Certified Public Accountants' Statement of Position 98-
1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 requires the capitalization of certain
internally generated software costs. In fiscal 2000, 1999 and 1998, the
Company capitalized $3.7 million, $0.9 million and $1.4 million, respectively,
of such software costs. Such software is amortized over three years and for
fiscal 2000, 1999 and 1998, the Company recorded amortization expense of $0.7
million, $0.5 million and $0.1 million, respectively.
F-17
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 1--Summary of Significant Accounting Policies -- (Continued)
Earnings Per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires dual presentation of basic and diluted earnings per
share ("EPS") on the face of the Statements of Consolidated Operations and
requires a reconciliation of the numerators and denominators of the basic and
diluted EPS calculations. Basic EPS is computed by dividing net income by the
weighted average shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if options to issue common stock were
exercised and converted to common stock.
The weighted average shares outstanding utilized in the basic EPS
calculation were 38,347,216 for fiscal 2000, 38,330,379 for fiscal 1999 and
38,273,859 for fiscal 1998. The common stock equivalents that were added to
the weighted average shares outstanding for purposes of diluted EPS were
85,041 for fiscal 1999. The common stock equivalents for fiscal 2000 and 1998
would have been 14,478 and 47,772, respectively; however, such shares were
antidilutive and thus excluded from the diluted EPS calculation.
Excess of Cost over Net Assets Acquired
The excess of cost over fair value of net assets acquired is amortized on a
straight-line basis between fifteen to forty years. The Company recorded
amortization expense of $1.5 million for both fiscal 2000 and 1998 and $1.2
million for fiscal 1999. The book value of excess of cost over net assets
acquired at February 24, 2001 and February 26, 2000 was $34.2 million and
$34.1 million, net of accumulated amortization relating to goodwill of $12.5
million and $11.1 million, respectively.
At each balance sheet date, Management reassesses the appropriateness of the
goodwill balance based on forecasts of cash flows from operating results on an
undiscounted basis. If the results of such comparison indicate that an
impairment may exist, the Company will recognize a charge to operations at
that time based upon the difference between the present value of the expected
cash flows from future operating results (utilizing a discount rate equal to
the Company's average cost of funds at that time) and the balance sheet value.
The recoverability of goodwill is at risk to the extent the Company is unable
to achieve its forecast assumptions regarding cash flows from operating
results. At February 24, 2001, the Company estimates that the cash flows
projected to be generated by the respective businesses on an undiscounted
basis should be sufficient to recover the existing goodwill balance over its
remaining life.
Long-Lived Assets
The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. Such review is based upon groups of assets and the undiscounted
estimated future cash flows from such assets to determine if the carrying
value of such assets are recoverable from their respective cash flows.
The Company recorded impairment losses during the year ended February 24,
2001 related to the sale leaseback transaction (see Note 14--Sale-Leaseback
Transaction for further details) and during the year ended February 27, 1999
related to its store and facility exit initiative (see Note 2--Store and
Facilities Exit Costs for further details).
Properties
Depreciation and amortization are calculated on the straight-line basis over
the estimated useful lives of the assets. Buildings are depreciated based on
lives varying from twenty to fifty years and equipment based on lives varying
from three to ten years. Real property leased under capital leases is
amortized over the lives of the respective leases or over their economic
useful lives, whichever is less. During fiscal 2000, 1999 and
F-18
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 1--Summary of Significant Accounting Policies -- (Continued)
1998, the Company disposed of and/or wrote down certain assets which resulted
in a pretax net loss of $4 million, a pretax net gain of $3 million, and a
pretax net loss of $5 million, respectively.
Income Taxes
The Company provides deferred income taxes on temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws.
Current Liabilities
Certain accounts payable checks issued but not presented to banks frequently
result in negative book balances for accounting purposes. Such amounts are
classified as "Book overdrafts" in the Consolidated Balance Sheets.
The Company accrues for vested and non-vested vacation pay. Liabilities for
compensated absences of $81.7 million and $78.8 million at February 24, 2001
and February 26, 2000, respectively, are included in the balance sheet caption
"Accrued salaries, wages and benefits".
Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB 25") with pro forma disclosure of net income and
earnings per share as if the fair value based method prescribed by SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123") had been applied.
Comprehensive Income
Effective March 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement requires that all components of
comprehensive income be reported prominently in the financial statements.
Currently, the Company has other comprehensive income relating to foreign
currency translation adjustment and minimum pension liability adjustment.
Accumulated other comprehensive loss as of February 24, 2001 includes
foreign currency translation of $72.7 million and an additional minimum
pension liability of less than $0.1 million. Accumulated other comprehensive
loss as of February 26, 2000 includes foreign currency translation of $58.0
million and an additional minimum pension liability of $2.7 million, net of
income tax benefit of $2.2 million. Accumulated other comprehensive loss as of
February 27, 1999 includes foreign currency translation of $64.8 million and
an additional minimum pension liability of $4.3 million, net of income tax
benefit of $3.4 million.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Consolidated Balance Sheets include liabilities with respect to self-
insured workers' compensation and general liability claims. The Company
determines the required liability of such claims based upon various
assumptions which include, but are not limited to, the Company's historical
loss experience, industry loss standards, projected loss development factors,
projected payroll, employee headcount and other internal data. It is
reasonably possible that the final resolution of some of these claims may
require significant expenditures by the Company in excess of its existing
reserves, over an extended period of time and in a range of amounts that
cannot be reasonably estimated.
F-19
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 1--Summary of Significant Accounting Policies -- (Continued)
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements in order to conform to the current year's presentation.
New Accounting Pronouncements Not Yet Adopted
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement requires that all derivative instruments be measured at
fair value and recognized in the balance sheet as either assets or
liabilities. In addition, the accounting for changes in the fair value of a
derivative (gains and losses) depends on the intended use of the derivative
and the resulting designation. For a derivative designated as a hedge, the
change in fair value will be recognized as a component of other comprehensive
income; for a derivative not designated as a hedge, the change in the fair
value will be recognized in the Statements of Consolidated Operations.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133" which delayed the adoption of SFAS 133 for one year, to
fiscal years beginning after June 15, 2000.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Financial Instruments and Certain Hedging Activities--An Amendment
of FASB Statement No. 133". This Statement amends the accounting and reporting
standards of SFAS 133 for certain derivative instruments, for certain hedging
activities and for decisions made by the FASB relating to the Derivatives
Implementation Group ("DIG") process. Certain decisions arising from the DIG
process that required specific amendments to SFAS 133 were incorporated into
this Statement. The Company is required to adopt SFAS 133 as amended in the
first quarter of fiscal 2001. At February 24, 2001, the Company did not have
any derivative instruments that would result in a transition adjustment upon
the adoption of this standard on February 25, 2001. However, the DIG is
continually interpreting SFAS 133. Contracts that the Company has concluded
are not derivatives could potentially be classified as derivatives based on
new interpretive guidance.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 was issued to provide guidance in applying
generally accepted accounting principles to the large number of revenue
recognition issues that registrants encounter, including nonrefundable, up-
front fees and the disclosure of judgements as to the appropriateness of the
principles relating to revenue recognition accounting policies. Since the
issuance of SAB 101, the Staff has received requests from a number of groups
asking for additional time to determine the effects, if any, on registrants'
revenue recognition practices and as such, the SEC has delayed the
implementation date of SAB 101 until no later than the fourth quarter of
fiscal years beginning after December 15, 1999. The Company has evaluated the
impact of this Staff Accounting Bulletin and has concluded that it has no
effect on the Consolidated Financial Statements. Retail revenue is recognized
at point of sale while wholesale revenue is recognized in accordance with its
terms, when goods are shipped. Vendor allowances and credits that relate to
the Company's buying and merchandising activities are recognized as earned.
In May 2000, the Emerging Issues Task Force ("EITF") issued No. 00-14
"Accounting for Certain Sales Incentives". The EITF reached a consensus on
several issues involving the accounting and income statement classification of
rebates, coupons and other discounts. The Company has evaluated the impact of
this issue and has concluded that it has no effect on the accounting or
classification of sales incentives because coupons issued by the Company are
recorded upon redemption as a reduction of sales.
F-20
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 2--Store and Facilities Exit Costs (Great Renewal--Phase I)
In May 1998, the Company initiated a vigorous assessment of all aspects of
its business operations in order to identify the factors that were impacting
the performance of the Company.
As a result of the above assessment, in the third quarter of fiscal 1998,
the Company decided to exit two warehouse facilities and a coffee plant in the
U.S., and a bakery plant in Canada. In connection with the exit plan, the
Company recorded a charge of approximately $11 million which is included in
"Store operating, general and administrative expense" in the Company's
Statements of Consolidated Operations for fiscal 1998. The $11 million charge
was comprised of $7 million of severance, $3 million of facilities occupancy
costs for the period subsequent to closure and $1 million to write-down the
facilities to their estimated fair value.
As of February 27, 1999, the Company had closed and terminated operations
with respect to the two warehouses and the coffee plant. The volume associated
with the warehouses was transferred to other warehouses in close geographic
proximity. Further, the manufacturing processes of the coffee plant were
transferred to the Company's remaining coffee processing facility. The
processing associated with the Canadian bakery was outsourced in January 1999.
In addition, in December 1998, the Company's Board of Directors approved a
plan which included the exit of 127 underperforming stores throughout the
United States and Canada and the disposal of two other properties. Included in
the 127 stores were 31 stores representing the entire Richmond, Virginia
market. Further, in January 1999, the Board of Directors approved the closure
of five additional underperforming stores. In connection with the Company's
plan to exit these 132 stores and the write-down of two properties, the
Company recorded a charge in the fourth quarter of fiscal 1998 of
approximately $215 million.
This $215 million charge consisted of $8 million of severance (including
pension withdrawal obligations), $1 million of facilities occupancy costs,
$114 million of store occupancy costs, which principally relates to the
present value of future lease obligations, net of anticipated sublease
recoveries, which extend through fiscal 2028, an $83 million write-down of
store fixed assets and a $9 million write-down to estimated fair value of two
properties. To the extent fixed assets included in those stores identified for
closure could be utilized in other continuing stores, the Company transferred
those assets to continuing stores. The Company planned to scrap fixed assets
that could not be transferred, and accordingly, the write-down was calculated
based upon an estimated scrap value. This fourth quarter charge of $215
million was reduced by approximately $2 million in fiscal 1998 due to changes
in estimates of pension withdrawal liabilities and fixed asset write-downs
from the time the original charge was recorded. The net charge of $213 million
is included in "Store operating, general and administrative expense" in the
Company's Statements of Consolidated Operations for fiscal 1998.
In addition to the charges recorded in fiscal 1998, there were other charges
related to the plan which could not be accrued for at February 27, 1999
because they did not meet the criteria for accrual under EITF 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
Activity (Including Certain Costs Incurred in a Restructuring)". Such costs
have been expensed as incurred as the plan was being executed. During fiscal
1999, the Company recorded an additional pretax charge of $11 million for
severance related to the 132 stores. No additional charges were recorded
during fiscal 2000.
In April 1999, the Company announced that it had reached definitive
agreements to sell 14 stores in the Atlanta, Georgia market, two of which were
previously included in the Company's store exit program. In conjunction with
the sale, the Company decided to exit the entire Atlanta market and close the
remaining 22 stores, as well as the distribution center and administrative
office. Accordingly, at the time of the announcement, the Company recorded a
fiscal 1999 first quarter net pretax charge of approximately $5 million. This
charge was comprised of severance of $6 million and future lease commitments
of $11 million, partially offset by a $12 million gain related to the
disposition of fixed and intangible assets. The net charge
F-21
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 2--Store and Facilities Exit Costs (Great Renewal--Phase I) --
(Continued)
is included in "Store operating, general and administrative expense" in the
Company's Statements of Consolidated Operations for fiscal 1999.
The Company paid $28 million of the total severance charges from the time of
the original charges through the end of fiscal 2000, which resulted from the
termination of approximately 3,400 employees. The remaining severance
liability relates to future obligations for early withdrawals from multi-
employer union pension plans.
The following reconciliation summarizes the activity related to the
aforementioned charges since their initial recording:
Severance
Store Fixed and Facilities
Occupancy Assets Benefits Occupancy Total
--------- -------- --------- ---------- --------
Original Charge...................................................... $113,732 $ 93,355 $ 15,102 $ 4,018 $226,207
Addition(1).......................................................... 1,900 -- -- -- 1,900
Utilization.......................................................... (1,100) (92,639) (3,794) (311) (97,844)
Adjustment(2)........................................................ -- (716) (1,242) 331 (1,627)
-------- -------- -------- ------- --------
Reserve Balance at Feb. 27, 1999..................................... 114,532 -- 10,066 4,038 128,636
Addition(1).......................................................... 15,730 -- 17,060 3,188 35,978
Utilization.......................................................... (4,614)(3) (295) (19,626) (3,659) (28,194)
Adjustment(2)........................................................ (22,195) 295 -- -- (21,900)
-------- -------- -------- ------- --------
Reserve Balance at Feb. 26, 2000..................................... 103,453 -- 7,500 3,567 114,520
Addition(1).......................................................... 5,062 -- -- -- 5,062
Utilization(4)....................................................... (25,654) -- (4,779) (463) (30,896)
Adjustment(2)........................................................ -- -- -- (3,104) (3,104)
-------- -------- -------- ------- --------
Reserve Balance at Feb. 24, 2001..................................... $ 82,861 $ -- $ 2,721 $ -- $ 85,582
======== ======== ======== ======= ========
- ---------------
(1) The additions to store occupancy of $1.9 million and $5.1 million during
fiscal 1998 and 2000 represent the present value of accrued interest
related to lease obligations. The fiscal 1999 addition represents an
increase to the store occupancy reserve for the present value of accrued
interest of $7.4 million, additional severance cost of $11.5 million and
the cost of exiting the Atlanta market (including store occupancy of $8.3
million, severance of $5.6 million and facilities costs of $3.2 million).
(2) At each balance sheet date, Management assesses the adequacy of the reserve
balance to determine if any adjustments are required as a result of changes
in circumstances and/or estimates. As a result, in fiscal 1998, the Company
recorded an adjustment to severance and benefits related to a change in the
estimate of the calculated pension withdrawal liability. In the third
quarter of fiscal 1999, the Company recorded a net reduction in "Store
operating, general and administrative expense" of $21.9 million to reverse
a portion of the $215 million restructuring charge recorded in fiscal 1998.
This amount represents a $22.2 million reduction in "Store operating,
general and administrative expense" for lower store occupancy costs
resulting primarily from earlier than anticipated lease terminations and
subleases. The credit is partially offset by $0.3 million of additional
fixed asset write-downs resulting from lower than anticipated proceeds from
the sale of fixed assets. In fiscal 2000, the Company recorded a net
reduction in "Store operating, general and administrative expense" of $3.1
million to reverse a portion of the $215 million restructuring charge
recorded in fiscal 1998. The reversal is primarily a result of a change in
estimate resulting from the sale of one of the Company's warehouses sold
during the first quarter of fiscal 2000.
F-22
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 2--Store and Facilities Exit Costs (Great Renewal--Phase I) --
(Continued)
(3) Store occupancy utilization for fiscal 1999 is comprised of $29.6 million
of lease and other occupancy payments for the period, net of $25.0 million
of net proceeds on the assignment of leases which was considered in
determining the original charge recorded during fiscal 1998.
(4) Store occupancy utilization of $25.7 million and facilities occupancy of
$0.5 million represent lease and other occupancy payments made during
fiscal 2000.
Based upon current available information, Management evaluated the reserve
balance of $85.6 million as of February 24, 2001 and has concluded that it is
adequate. The Company will continue to monitor the status of the vacant
properties and further adjustments to the reserve balance may be recorded in
the future, if necessary.
At February 24, 2001, approximately $14 million of the reserve is included
in "Other accruals" and the remaining amount is included in "Other non-current
liabilities" in the Consolidated Balance Sheets.
Included in the Statements of Consolidated Operations are the operating
results of the 132 underperforming stores (including 31 stores in the
Richmond, Virginia market) and the 34 Atlanta stores which the Company has
exited. The operating results of these stores are as follows:
52 Weeks Ended
----------------------------------------------------------
February 24, 2001 February 26, 2000 February 27, 1999
----------------- ----------------- -----------------
Sales................................................................ $ 678 $ 200,208 $1,069,441
====== ========= ==========
Operating loss....................................................... $(139) $(30,572) $ (43,105)
====== ========= ==========
As of the end of fiscal 2000, the Company had closed 165 stores, including
34 stores in the Atlanta, Georgia market and 31 stores in the Richmond,
Virginia market.
Note 3--Inventory
Approximately 12% and 13% of the Company's inventories are valued using the
last-in, first-out ("LIFO") method at February 24, 2001 and February 26, 2000,
respectively. Such inventories would have been $18.1 million and $19.6 million
higher at February 24, 2001 and February 26, 2000, respectively, if the retail
and first-in, first-out methods were used. The Company recorded a LIFO credit
of $1.5 million in fiscal 2000 compared to LIFO charges of approximately $0.9
million in 1999 and $1.0 million in 1998. Liquidation of LIFO layers in the
periods reported did not have a significant effect on the results of
operations.
Note 4--Wholesale Franchise Business
The Company serviced 68 franchised stores as of February 24, 2001 and 65
stores as of February 26, 2000. These franchised stores are required to
purchase inventory exclusively from the Company which acts as a wholesaler to
the franchisees. During fiscal 2000, 1999 and 1998, the Company had wholesale
sales to these franchised stores of $638 million, $523 million and $387
million, respectively. A majority of the franchised stores were converted from
Company operated supermarkets. The Company subleases the stores and leases the
equipment in the stores to the franchisees. The Company also provides
merchandising, advertising, accounting and other consultative services to the
franchisees for which it receives a nominal fee which mainly represents the
reimbursements of costs incurred to provide such services.
The Company holds as assets inventory notes collateralized by the inventory
in the stores and equipment lease receivables collateralized by the equipment
in the stores. The current portion of the inventory notes and equipment
leases, net of allowance for doubtful accounts, amounting to approximately
$3.7 million and $4.1 million, are included in "Accounts receivable" at
February 24, 2001 and February 26, 2000, respectively. The long-term portion
of the inventory notes and equipment leases, net of allowance for doubtful
accounts,
F-23
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 4--Wholesale Franchise Business -- (Continued)
amounting to approximately $55.3 million and $53.4 million, are included in
"Other assets" at February 24, 2001 and February 26, 2000, respectively.
The repayment of the inventory notes and equipment leases are dependent upon
positive operating results of the stores. To the extent that the franchisees
incur operating losses, the Company establishes an allowance for doubtful
accounts. The Company continually assesses the sufficiency of the allowance on
a store by store basis based upon the operating results and the related
collateral underlying the amounts due from the franchisees. In the event of
default by a franchisee, the Company reserves the option to reacquire the
inventory and equipment at the store and operate the franchise as a corporate
owned store.
Included below are the amounts due to the Company for the next five years
and thereafter from the franchised stores for equipment leases and inventory
notes.
Fiscal
------
2001 ................................................................ $ 7,715
2002 ................................................................ 10,361
2003 ................................................................ 9,777
2004 ................................................................ 9,636
2005 ................................................................ 9,557
2006 and thereafter ................................................. 35,909
--------
82,955
Less interest portion ............................................... (23,995)
--------
Due from franchise business ......................................... $ 58,960
========
For fiscal 2000, 1999 and 1998, approximately $15 million, $18 million and
$8 million, respectively, of the franchise business notes relate to equipment
leases which were non-cash transactions and, accordingly, have been excluded
from the Statements of Consolidated Cash Flows.
Note 5--Indebtedness
Debt consists of the following:
February 24, 2001 February 26, 2000
----------------- -----------------
9.375% Notes, due August 1, 2039 ...... $200,000 $200,000
7.75% Notes, due April 15, 2007 ....... 300,000 300,000
7.70% Senior Notes, due January 15,
2004................................. 200,000 200,000
7.78% Notes, due November 1, 2000 ..... -- 75,000
Mortgages and Other Notes, due 2001
through 2003
(average interest rates at year end of
8.38% and 7.12%, respectively)....... 28,658 8,023
U.S. Bank Borrowings at 6.55% and
6.35%, respectively.................. 194,607 87,000
Less unamortized discount on 7.75%
Notes................................ (1,749) (1,966)
-------- --------
921,516 868,057
Less current portion .................. (6,195) (2,382)
-------- --------
Long-term debt ........................ $915,321 $865,675
======== ========
At February 24, 2001, the Company had an unsecured five year $498 million
revolving credit agreement (the "Unsecured Credit Agreement") which was to
expire on June 10, 2002 with a syndicate of banks, enabling it to borrow funds
on a revolving basis sufficient to refinance short-term borrowings. This
agreement
F-24
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 5--Indebtedness -- (Continued)
was subsequently replaced by a secured revolving credit agreement described
below. As of February 24, 2001, the Unsecured Credit Agreement was comprised
of the U.S. credit agreement amounting to $415 million and the Canadian credit
agreement amounting to C$121 million (U.S. $83 million). As of February 24,
2001, the Company had $190 million of borrowings under the Unsecured Credit
Agreement consisting of $145 million under the U.S. credit agreement and C$69
million (U.S. $45 million) under the Canadian credit agreement. This compared
to borrowings of $60 million under the U.S. credit agreement and no borrowings
under the Canadian credit agreement at February 26, 2000. Accordingly, as of
February 24, 2001, the Company had $308 million available under the Unsecured
Credit Agreement consisting of $270 million under the U.S. credit agreement
and C$53 million (U.S. $38 million) under the Canadian credit agreement. This
compared to availability of $439 million at February 26, 2000 consisting of
$405 million under the U.S. credit agreement and C$50 million (U.S. $34
million) under the Canadian credit agreement. The Company paid a facility fee
of 0.375% per annum on the total commitment of the U.S. and Canadian revolving
credit facilities and 1% on the borrowed amount.
On February 23, 2001, the Company executed an agreement with a syndicate of
banks to replace the Unsecured Credit Agreement with a $425 million secured
revolving credit agreement (the "Secured Credit Agreement") expiring December
31, 2003. The outstanding borrowings under the Unsecured Credit Agreement were
refinanced with this new facility. This agreement is secured primarily by
inventory and company-owned real estate which, at February 24, 2001, had a net
book value of $658 million and $88 million, respectively. The Secured Credit
Agreement was comprised of a U.S. credit agreement amounting to $340 million
and a Canadian credit agreement amounting to C$131 million (U.S. $85 million).
Based on the Company's current debt rating, borrowings under the agreement
bear interest on spreads to LIBOR and Prime, and at February 24, 2001 the
borrowing rate under the new agreement was 8.03%. Upon execution of the
Secured Credit Agreement, the syndicate was instructed to fund the Company in
an amount sufficient to repay the entire outstanding balance on the Unsecured
Credit Agreement. Such funding took place on February 28, 2001. If the
repayment of the Unsecured Credit Agreement had been funded on February 24,
2001, after reducing availability for outstanding letters of credit,
availability under the new facility would have been $183 million.
On November 1, 2000, the Company's Canadian subsidiary, The Great Atlantic &
Pacific Company of Canada, Limited, repaid its outstanding $75 million 5 year
Notes denominated in U.S. dollars. The repayment of these Notes was funded by
the Unsecured Credit Agreement at an average rate of 6.55%.
As of February 24, 2001 and February 26, 2000, the Company had borrowings
under uncommitted lines of credit of $5 million and $27 million, respectively.
As of February 24, 2001, the Company has outstanding a total of $500 million
of unsecured, non-callable public debt securities in the form of $200 million
7.70% Notes due January 15, 2004 and $300 million 7.75% Notes due April 15,
2007. The Company also has outstanding $200 million unsecured, public debt
securities in the form of 9.375% Notes due August 1, 2039 which are callable
beginning on August 11, 2004.
During fiscal 2000, the Company entered into an agreement which provides
financing for software purchases and hardware leases primarily relating to the
Company's Great Renewal - Phase II supply chain and business process
initiative ("GR II"). Presently, software purchases and hardware leases will
be financed at an effective rate of 8.49% per annum. Software purchases and
hardware leases will occur from time to time over the next four years. The
Company currently makes equal monthly payments of $1.4 million. Such payments
are subject to change based upon the timing and amount of such funding. As of
February 24, 2001, $26.8 million was funded for software purchases and
hardware with a total fair market value of $10.7 million had been leased to
the Company.
F-25
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 5--Indebtedness -- (Continued)
The Company's loan agreements and certain of its notes contain various
financial covenants which require, among other things, minimum fixed charge
coverage and maximum levels of leverage and capital expenditures. During the
4th quarter of fiscal 2000 the Company negotiated the aforementioned Secured
Credit Agreement to replace its prior facility. This agreement includes
covenants, terms and conditions which reflect the Company's current operating
performance and capital programs. At February 24, 2001, the Company was in
compliance with the covenants on the notes and the Secured Credit Agreement.
The net book value of real estate pledged as collateral for all mortgage
loans amounted to approximately $4.5 million at February 24, 2001 and $8.8
million at February 26, 2000.
The U.S. bank borrowings of $195 million and $87 million are classified as
non-current as of February 24, 2001 and February 26, 2000, respectively, as
the Company has the ability and intent to refinance these borrowings on a
long-term basis.
The Company has filed two Shelf Registration Statements dated January 23,
1998 and June 23, 1999, allowing it to offer up to $350 million of debt and
equity securities as of February 24, 2001 at terms determined by market
conditions at the time of sale.
Maturities for the next five fiscal years and thereafter are: 2001--$6.2
million; 2002--$6.0 million; 2003--$400.5 million; 2004--$5.9 million; 2005--
$2.3 million; 2006 and thereafter--$502.4 million. Interest payments on
indebtedness were approximately $80 million for fiscal 2000, $66 million for
fiscal 1999 and $56 million for fiscal 1998.
Note 6--Fair Value of Financial Instruments
The estimated fair values of the Company's indebtedness are as follows:
February 24, 2001 February 26, 2000
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
9.375% Notes, due August 1, 2039 .................................................... $200,000 $161,280 $200,000 $175,000
7.75% Notes, due April 15, 2007 ..................................................... 298,251 217,723 298,034 270,094
7.70% Senior Notes, due January 15, 2004 ............................................ 200,000 160,000 200,000 188,250
7.78% Notes, due November 1, 2000 ................................................... -- -- 75,000 74,438
Mortgages and Other Notes, due 2001 through 2003 .................................... 28,658 28,658 8,023 8,023
U.S. Bank Borrowings ................................................................ 194,607 194,607 87,000 87,000
-------- -------- -------- --------
Total Indebtedness .................................................................. $921,516 $762,268 $868,057 $802,805
======== ======== ======== ========
Fair value for the public debt securities is based on quoted market prices.
As of February 24, 2001 and February 26, 2000, the carrying values of cash and
short-term investments, accounts receivable and accounts payable approximated
fair values due to the short-term maturities of these instruments.
As of the end of fiscal 2000, the Company holds equity securities of both
common and cumulative preferred stock in Isosceles PLC, which were written-off
in their entirety during fiscal 1992. There are no quoted market prices for
these securities and it is not practicable, considering the materiality of
these securities to the Company, to obtain an estimate of their fair value.
The Company believes that the fair value for these securities is zero based
upon Isosceles' current and prior years' results.
F-26
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 7--Lease Obligations
The Company operates primarily in leased facilities. Lease terms generally
range up to twenty-five years for store leases and thirty years for other
leased facilities, with options to renew for additional periods. The majority
of the leases contain escalation clauses relating to real estate tax increases
and certain store leases provide for increases in rentals when sales exceed
specified levels. In addition, the Company also leases some store equipment
and trucks.
The Consolidated Balance Sheets include the following:
February 24, 2001 February 26, 2000
----------------- -----------------
Real property leased under capital
leases............................... $ 205,409 $ 207,117
Accumulated amortization .............. (120,651) (112,971)
--------- ---------
$ 84,758 $ 94,146
========= =========
During fiscal 2000, 1999 and 1998, the Company entered into new capital
leases totaling $7 million, $16 million and $12 million, respectively. These
capital lease amounts are non-cash transactions and, accordingly, have been
excluded from the Statements of Consolidated Cash Flows. Interest paid as part
of capital lease obligations was approximately $14 million in fiscal 2000,
1999 and 1998.
Rent expense for operating leases consists of:
52 Weeks Ended
----------------------------------------------------------
February 24, 2001 February 26, 2000 February 27, 1999
----------------- ----------------- -----------------
Minimum rentals...................................................... $219,113 $194,158 $193,703
Contingent rentals................................................... 3,777 3,780 3,987
-------- -------- --------
$222,890 $197,938 $197,690
======== ======== ========
Future minimum annual lease payments for capital leases and noncancelable
operating leases in effect at February 24, 2001 are shown in the table below.
All amounts are exclusive of lease obligations and sublease rentals applicable
to facilities for which reserves have previously been established. In
addition, the Company subleases 68 stores to the franchise business. Included
in the operating lease table below are the rental payments made by the Company
partially offset by the rental income received from the franchised stores.
Capital
Leases
Real Operating
Fiscal Property Leases
- ------ --------- ----------
2001 ................................................. $ 23,524 $ 238,281
2002 ................................................. 22,843 235,736
2003 ................................................. 20,685 226,964
2004 ................................................. 18,967 220,304
2005 ................................................. 14,880 214,063
2006 and thereafter .................................. 139,037 2,241,819
--------- ----------
239,936 $3,377,167
==========
Less executory costs ................................. (1,248)
---------
Net minimum rentals .................................. 238,688
Less interest portion ................................ (120,257)
---------
Present value of net minimum rentals $ 118,431
=========
F-27
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 8--Income Taxes
The components of (loss) income before income taxes are as follows:
52 Weeks Ended
----------------------------------------------------------
February 24, 2001 February 26, 2000 February 27, 1999
----------------- ----------------- -----------------
United States........................................................ $(74,768) $ (77) $(244,573)
Canadian............................................................. 35,095 27,080 15,289
-------- ------- ---------
Total................................................................ $(39,673) $27,003 $(229,284)
======== ======= =========
The (benefit from) provision for income taxes consists of the following:
52 Weeks Ended
----------------------------------------------------------
February 24, 2001 February 26, 2000 February 27, 1999
----------------- ----------------- -----------------
Current:
Federal.............................................................. $ -- $ 872 $ --
Canadian............................................................. 531 710 552
State and local...................................................... 3,000 3,003 3,000
-------- ------- ---------
3,531 4,585 3,552
-------- ------- ---------
Deferred:
Federal.............................................................. (24,340) 121 (77,489)
Canadian............................................................. 16,083 12,045 6,806
State and local...................................................... (9,879) (3,908) (25,786)
Canadian valuation allowance......................................... -- -- (69,203)
-------- ------- ---------
(18,136) 8,258 (165,672)
-------- ------- ---------
(Benefit from) provision for income taxes............................ $(14,605) $12,843 $(162,120)
======== ======= =========
F-28
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 8--Income Taxes -- (Continued)
The deferred income tax (benefit) provision results primarily from the
annual change in temporary differences between amounts of assets and
liabilities for financial reporting purposes and such amounts as measured by
tax laws, net operating tax loss carryforwards and in fiscal 1998, the
Canadian valuation allowance.
The Company recorded an income tax benefit amounting to $14.6 million in
fiscal 2000 as compared to an income tax provision of $12.8 million for fiscal
1999 and an income tax benefit of $162.1 million for fiscal 1998. The fiscal
1998 benefit of $162 million includes reversals of the Canadian operations
deferred tax valuation allowance. During the first three quarters of fiscal
1998, the Company reversed approximately $9 million of the Canadian valuation
allowance to the extent that the Canadian operations had taxable income. In
the fourth quarter of fiscal 1998, the Company concluded that it was more
likely than not that the net deferred tax assets related to the Canadian
operations would be realized based upon Management's plan to close
underperforming stores in Canada (see Note 2--Store and Facilities Exit
Costs), the implementation of certain tax strategies and the continued
performance improvements of the Canadian operations. Accordingly, the Company
reversed the remaining portion of the Canadian deferred tax valuation
allowance amounting to approximately $60 million. The deferred tax benefit
recorded for U.S. operations of approximately $103 million mainly relates to
book and tax differences of the store and facilities exit costs recorded in
fiscal 1998.
The Company has elected to permanently reinvest earnings of the Canadian
subsidiary. Accordingly, the Company does not provide for taxes associated
with Canada's undistributed earnings.
As of February 24, 2001, the Company had net operating tax loss
carryforwards of approximately $62 million from the Canadian operations and
$170 million from the U.S. operations. The Canadian portion of the net
operating loss carryforwards will expire between February 2002 and February
2003 and the U.S. portion will expire between February 2019 and February 2020.
The Company has assessed its ability to utilize its net operating loss
carryforwards and has concluded that no valuation allowance is required.
A reconciliation of income taxes at the 35% federal statutory income tax
rate for fiscal 2000, 1999 and 1998 to income taxes as reported is as follows:
52 Weeks Ended
-------------------------------------------
February 24, February 26, February 27,
2001 2000 1999
-------- ------- ---------
Income taxes computed at federal statutory income tax rate.................. $(13,886) $ 9,451 $ (80,249)
State and local income taxes, net of
federal tax benefit....................................................... (4,471) (588) (14,810)
Tax rate differential relating to
Canadian operations....................................................... 4,330 3,278 2,007
Canadian valuation allowance................................................ -- -- (69,203)
Goodwill and other permanent
differences............................................................... (578) 702 135
-------- ------- ---------
Income taxes, as reported................................................... $(14,605) $12,843 $(162,120)
======== ======= =========
F-29
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 8--Income Taxes -- (Continued)
Income tax payments, net of refunds, for fiscal 2000, 1999 and 1998 were
approximately $2 million, $6 million and $2 million, respectively.
The components of net deferred tax assets (liabilities) are as follows:
February 24, February 26,
2001 2000
--------- ---------
Current assets:
Insurance reserves............................. $ 27,073 $ 31,073
Other reserves and accrued benefits............ 40,435 40,659
Accrued postretirement and postemployment
benefits...................................... 1,111 1,406
Lease obligations.............................. 1,198 1,315
Pension obligations............................ 1,776 4,241
Miscellaneous.................................. 4,505 6,612
--------- ---------
76,098 85,306
--------- ---------
Current liabilities:
Inventories.................................... (9,482) (15,561)
Health and welfare............................. (9,631) (9,841)
Miscellaneous.................................. (2,751) (5,693)
--------- ---------
(21,864) (31,095)
--------- ---------
Deferred income taxes included in prepaid
expenses and other current assets.............. $ 54,234 $ 54,211
========= =========
Non-current assets:
Isosceles investment........................... $ 42,617 $ 42,617
Alternative minimum tax........................ 7,500 7,500
Fixed assets................................... -- 459
Other reserves................................. 55,583 56,372
Lease obligations.............................. 13,193 14,530
Net operating loss carryforwards............... 107,862 75,417
Insurance reserves............................. 8,400 4,200
Accrued postretirement and postemployment
benefits...................................... 28,259 31,035
Pension obligations............................ 9,503 4,140
Step rents..................................... 19,526 15,098
Miscellaneous.................................. 768 7,364
--------- ---------
293,211 258,732
--------- ---------
Non-current liabilities:
Fixed assets................................... (254,907) (244,050)
Pension obligations............................ (23,205) (20,807)
Miscellaneous.................................. (2,463) (2,352)
--------- ---------
(280,575) (267,209)
--------- ---------
Net non-current deferred income tax asset
(liability).................................... $ 12,636 $ (8,477)
========= =========
F-30
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 8--Income Taxes -- (Continued)
The net non-current deferred tax asset and liability is recorded in the
Consolidated Balance Sheets as follows:
February 24, February 26,
2001 2000
-------- --------
Other assets .................................... $ 32,995 $ 49,992
Non-current liability ........................... (20,359) (58,469)
-------- --------
Net non-current deferred income tax asset
(liability)................................... $ 12,636 $ (8,477)
======== ========
Note 9--Retirement Plans and Benefits
Defined Benefit Plans
The Company provides retirement benefits to certain non-union and union
employees under various defined benefit plans. The Company's defined benefit
pension plans are non-contributory and benefits under these plans are
generally determined based upon years of service and, for salaried employees,
compensation. The Company funds these plans in amounts consistent with the
statutory funding requirements.
During fiscal 1998, the Company adopted SFAS No. 132, "Employers' Disclosure
about Pension and Postretirement Benefits" ("SFAS 132"). SFAS 132 standardizes
the disclosure requirements for pension and other postretirement benefits.
This Statement addresses disclosure only. It does not address expense
recognition or liability measurement. Accordingly, there was no effect on
financial position or net income as a result of adopting SFAS 132.
The components of net pension cost are as follows:
52 Weeks Ended
-------------------------------------------
February 24, February 26, February 27,
2001 2000 1999
-------- -------- --------
Service cost.............................................................. $ 8,017 $ 16,153 $ 14,014
Interest cost............................................................. 19,192 26,300 25,872
Expected return on plan assets............................................ (25,429) (34,890) (32,040)
Amortization of unrecognized net asset.................................... (1,255) (1,194) (1,184)
Amortization of unrecognized net prior service cost....................... 910 1,240 1,237
Amortization of unrecognized net actuarial (gain) loss.................... (1,432) 730 506
Curtailments and settlements.............................................. 668 1,205 863
-------- -------- --------
Net pension cost......................................................... $ 671 $ 9,544 $ 9,268
======== ======== ========
F-31
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 9--Retirement Plans and Benefits -- (Continued)
The Company's defined benefit pension plans are accounted for on a calendar
year basis. The majority of plan assets is invested in listed stocks and
bonds. The following tables set forth the change in benefit obligations and
change in plan assets for fiscal 2000 and 1999 for the Company's defined
benefit plans:
2000 1999
--------- --------
Change in Benefit Obligation
----------------------------
Benefit obligation--beginning of year................. $ 393,614 $423,156
Service cost.......................................... 8,017 16,153
Interest cost......................................... 19,192 26,300
Actuarial loss (gain)................................. 12,467 (60,065)
Benefits paid......................................... (23,399) (26,195)
Amendments............................................ 29 1,721
Curtailments and settlements.......................... (122,633) 1,182
Effect of exchange rate............................... (12,668) 11,362
--------- --------
Benefit obligation--end of year...................... $ 274,619 $393,614
========= ========
Change in Plan Assets
---------------------
Plan assets at fair value--beginning of year.......... $ 464,438 $458,663
Actual return on plan assets.......................... 53,441 9,023
Company contributions................................. 5,218 9,865
Benefits paid......................................... (23,399) (26,195)
Curtailments and settlements.......................... (136,981) --
Effect of exchange rate............................... (15,937) 13,082
--------- --------
Plan assets at fair value--end of year............... $ 346,780 $464,438
========= ========
Amounts recognized in the Company's Consolidated Balance Sheets consist of
the following:
2000 1999
-------- --------
Plan assets in excess of projected benefit obligation.. $ 72,161 $ 70,824
Unrecognized net transition asset...................... (1,881) (3,013)
Unrecognized prior service cost........................ 2,419 6,262
Unrecognized net actuarial gain........................ (56,231) (43,891)
Interim contributions between calendar and fiscal year
end................................................... 268 --
-------- --------
Total recognized in the Consolidated Balance Sheets... $ 16,736 $ 30,182
======== ========
Prepaid benefit cost................................... $ 44,592 $ 56,529
Accrued benefit liability.............................. (28,036) (31,504)
Intangible asset....................................... 116 236
Accumulated other comprehensive loss................... 38 2,729
Tax benefit............................................ 26 2,192
-------- --------
Total recognized in the Consolidated Balance Sheets... $ 16,736 $ 30,182
======== ========
F-32
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 9--Retirement Plans and Benefits -- (Continued)
Plans with accumulated benefit obligation in excess of plan assets consist
of the following:
2000 1999
------- -------
Accumulated benefit obligation........................... $21,998 $92,973
Projected benefit obligation............................. $22,705 $97,114
Plan assets at fair value................................ $ 275 $69,480
The prepaid pension asset is included in "Other assets" while the pension
liability is included in "Accrued salaries, wages and benefits" and "Other
non-current liabilities".
At February 24, 2001 and February 26, 2000, the Company's additional minimum
pension liability for its defined benefit plans was in excess of the
unrecognized prior service costs and net transition obligation and
accordingly, less than $0.1 million and $2.7 million, each net of income tax
benefit, was reflected as a reduction to stockholders' equity, respectively.
During the year ended February 25, 1995, the Company's Canadian subsidiary
and the United Food & Commercial Workers International Union, Locals 175 and
633, entered into an agreement resulting in the amalgamation of three of the
Company's Canadian defined benefit pension plans with the Canadian Commercial
Workers Industry Pension Plan ("CCWIPP"), retroactive to July 1, 1994. The
agreement was subject to the approval of the CCWIPP trustees and the
appropriate regulatory bodies. During the first quarter of fiscal 2000, the
Company received final approval of the agreement. Under the terms of this
agreement and as reflected in the above tables, CCWIPP assumed the assets and
defined benefit liabilities of the three pension plans. Further, the Company
is required to make defined contributions to CCWIPP based upon hours worked by
employees who are members of CCWIPP and to the extent assets transferred
exceeded liabilities assumed, the Company received a funding holiday by CCWIPP
for such defined contributions. As a result of this transfer, during the first
quarter of fiscal 2000, the Company recorded a $0.4 million net expense and a
$2.7 million adjustment to the minimum pension liability.
Actuarial assumptions used to determine year-end plan status are as follows:
2000 1999
------------------- --------------
U.S. Canada U.S. Canada
Weighted average discount rate.................................................. 7.50% 7.00% 7.75% 7.50%
Weighted average rate of compensation increase.................................. 4.50% 4.00% 4.75% 4.00%
Expected long-term rate of return on plan assets................................ 7.50-8.50% 8.50% 8.75% 8.40%
The impact of the changes in the actuarial assumptions has been reflected in
the funded status of the pension plans and the Company believes that such
changes will not have a material effect on net pension cost for fiscal 2001.
Defined Contribution Plans
The Company maintains a defined contribution retirement plan to which the
Company contributes an amount equal to 4% of eligible participants' salaries
and a savings plan to which eligible participants may contribute a percentage
of eligible salary. The Company contributes to the savings plan based on
specified percentages of the participants' eligible contributions.
Participants become fully vested in the Company's contributions after 5 years
of service. The Company's contributions charged to operations for both plans
were approximately $11.3 million, $10.8 million and $10.9 million in fiscal
years 2000, 1999 and 1998, respectively.
F-33
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 9--Retirement Plans and Benefits -- (Continued)
Multi-employer Union Pension Plans
The Company participates in various multi-employer union pension plans which
are administered jointly by management and union representatives and which
sponsor most full-time and certain part-time union employees who are not
covered by the Company's other pension plans. The pension expense for these
plans approximated $35.3 million, $31.5 million and $34.1 million in fiscal
2000, 1999 and 1998, respectively. The Company could, under certain
circumstances, be liable for unfunded vested benefits or other expenses of
jointly administered union/management plans. At this time, the Company has not
established any liabilities for future withdrawals because such withdrawals
from these plans are not probable.
Postretirement Benefits
The Company provides postretirement health care and life benefits to certain
union and non-union employees. The Company recognizes the cost of providing
postretirement benefits during employees' active service period.
The components of net postretirement benefits cost are as follows:
52 Weeks Ended
-------------------------------------------
February 24, February 26, February 27,
2001 2000 1999
------- ------- ------
Service cost.................................................................. $ 487 $ 548 $1,666
Interest cost................................................................. 2,060 1,977 3,464
Prior service cost............................................................ (1,347) (1,347) (263)
Amortization of (gain) loss................................................... (692) (509) 27
------- ------- ------
Net postretirement benefits cost............................................. $ 508 $ 669 $4,894
======= ======= ======
The unfunded status of the plans is as follows:
52 Weeks Ended
-------------------------------------------
February 24, February 26, February 27,
2001 2000 1999
------- ------- --------
Unfunded accumulated benefit obligation at
beginning of year............................................................ $28,190 $36,690 $ 48,980
Service cost.................................................................. 487 548 1,666
Interest cost................................................................. 2,060 1,977 3,464
Benefits paid................................................................. (1,937) (1,782) (2,790)
Actuarial loss (gain)......................................................... 6,131 (9,533) 1,837
Plan amendment................................................................ -- -- (16,162)
Foreign exchange.............................................................. (1,218) 290 (305)
------- ------- --------
Accumulated benefit obligation at end of year................................. 33,713 28,190 36,690
Unrecognized net gain from experience differences............................. 2,658 9,191 221
Unrecognized prior service cost............................................... 13,715 14,552 15,899
------- ------- --------
Accrued postretirement benefit costs at end of year........................... $50,086 $51,933 $ 52,810
======= ======= ========
Assumed discount rate:
U.S.......................................................................... 7.50% 7.75% 6.50%
Canada....................................................................... 7.00% 7.50% 6.50%
The assumed rate of future increase in health care benefit cost for fiscal
2000 was 8.75% and is expected to decline to 5.0% by the year 2020 and remain
at that level thereafter. The effect of a 1% change in the
F-34
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 9--Retirement Plans and Benefits -- (Continued)
assumed health care cost trend rate for each future year on the net
postretirement health care cost would either increase by $0.3 million or
decrease by $0.2 million, while the accumulated postretirement benefit
obligation would either increase by $3.0 million or decrease by $2.4 million.
Postemployment Benefits
The Company accrues costs for preretirement, postemployment benefits
provided to former or inactive employees and recognizes an obligation for
these benefits. The costs of these benefits have been included in operations
for each of the three fiscal years in the period ended February 24, 2001. As
of February 24, 2001 and February 26, 2000, the Company has a liability
reflected in the Consolidated Balance Sheets of $23.6 million and $24.8
million, respectively, related to such benefits.
Note 10--Stock Options
At February 24, 2001, the Company has four fixed stock-based compensation
plans. The Company applies the principles of APB 25 for stock options and FASB
Interpretation No. 28 for Stock Appreciation Rights ("SAR's"). SAR's allow the
holder, in lieu of purchasing stock, to receive cash in an amount equal to the
excess of the fair market value of common stock on the date of exercise over
the option price. Most of the options and SAR's vest over a four year period
on the anniversary date of issuance, while some options vest immediately.
Effective July 13, 1999, the Board of Directors and stockholders approved
the 1998 Long Term Incentive and Share Award Plan (the "1998 Plan") for its
officers and key employees. The 1998 Plan provides for the granting of
5,000,000 shares as options, SAR's or stock awards.
The Company's 1994 Stock Option Plan (the "1994 Plan") for officers and key
employees provided for the granting of 1,500,000 shares as either options or
SAR's. The 1984 Stock Option Plan for officers and key employees, which
expired on February 1, 1994, provided for the granting of 1,500,000 shares and
was amended as of July 10, 1990 to increase by 1,500,000 the number of options
available for grant as either options or SAR's.
The 1994 Stock Option Plan for Board of Directors provides for the granting
of 100,000 stock options at the fair market value of the Company's common
stock at the date of grant. Options granted under this plan totaled 8,000 in
fiscal 2000, 3,600 in fiscal 1999 and 1,600 in fiscal 1998.
Options and SAR's issued under all of the Company's plans are granted at the
fair market value of the Company's common stock at the date of grant. In
fiscal 2000, 1,490,550 options were granted under the 1998 Plan. There were no
SAR's granted during fiscal 2000.
F-35
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 10--Stock Options -- (Continued)
The Company accounts for stock options using the intrinsic value-based
method prescribed by APB 25. Had compensation cost for the Company's stock
options been determined based on the fair value at the grant dates for awards
under those plans consistent with the fair value methods prescribed by SFAS
123, the Company's net (loss) income and (loss) income per share would have
been reduced to the pro forma amounts indicated below:
52 Weeks Ended
-------------------------------------------
February 24, February 26, February 27,
2001 2000 1999
-------- ------- --------
Net (loss) income:
As reported ................................................................... $(25,068) $14,160 $(67,164)
Pro forma ..................................................................... $(29,211) $11,275 $(68,987)
Net (loss) income per share--basic and diluted:
As reported ................................................................... $ (0.65) $ 0.37 $ (1.75)
Pro forma ..................................................................... $ (0.76) $ 0.29 $ (1.80)
The pro forma effect on net (loss) income and (loss) income per share may
not be representative of the pro forma effect in future years because it
includes compensation cost on a straight-line basis over the vesting periods
of the grants and does not take into consideration the pro forma compensation
costs for grants made prior to fiscal 1995.
The fair value of the fiscal 2000, 1999 and 1998 option grants was estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions:
52 Weeks Ended
-------------------------------------------
February 24, February 26, February 27,
2001 2000 1999
------------ ------------ ------------
Expected life................................................................... 7 years 7 years 7 years
Volatility...................................................................... 60% 30% 30%
Dividend yield range............................................................ 0%-4.60% 1.08%-1.42% 1.23%-1.63%
Risk-free interest rate range................................................... 4.94%-6.69% 5.37%-6.78% 5.14%-5.63%
For fiscal 2000, no expense was recorded with respect to SAR's due to the
decline in the Company's stock price. For fiscal 1999, the Company recognized
a $3.1 million credit to reverse previously accrued SAR compensation charges
due to the decline in the Company's stock price. The Company recognized
compensation expense of $0.6 million in fiscal 1998, with respect to SAR's.
There was no compensation expense recognized for the other fixed plans since
the exercise price of the stock options equaled the fair market value of the
Company's common stock on the date of grant.
F-36
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 10--Stock Options -- (Continued)
A summary of option transactions is as follows:
Officers, Key Employees and Directors
---------------------------------------
Weighted
Average
Exercise
Shares Price
--------- ------
Outstanding February 29, 1998 .......................... 949,950 $27.78
Granted............................................... 897,600 31.32
Cancelled or expired.................................. (10,000) 27.88
Exercised............................................. (37,750) 27.88
--------- ------
Outstanding February 27, 1999 .......................... 1,799,800 $29.55
Granted............................................... 491,650 32.35
Cancelled or expired.................................. (211,000) 29.69
Exercised............................................. (56,500) 26.64
--------- ------
Outstanding February 26, 2000 .......................... 2,023,950 $30.30
Granted............................................... 1,498,550 16.11
Cancelled or expired.................................. (277,836) 26.88
--------- ------
Outstanding February 24, 2001 .......................... 3,244,664 $24.04
========= ======
Exercisable at:
February 26, 2000..................................... 811,450 $28.61
February 24, 2001..................................... 1,046,205 $29.55
Following are the weighted average fair values of options granted during the
years ended:
February 27, 1999 ..................................................... $11.72
February 26, 2000 ..................................................... $12.64
February 24, 2001 ..................................................... $ 8.80
F-37
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 10--Stock Options -- (Continued)
A summary of stock options outstanding and exercisable at February 24, 2001
is as follows:
Weighted
Options Average Weighted Options Weighted
Range Outstanding Remaining Average Exercisable Average
of Exercise at Contractual Exercise at Exercise
Prices 2/24/01 Life Price 2/24/01 Price
--------------- --------- --------- ------ --------- ------
$ 7.44 - $10.87 277,000 9.8 years $ 7.99 -- --
$15.78 - $18.88 1,163,600 9.1 years $17.95 -- --
$21.50 - $25.88 26,000 4.6 years $23.40 26,000 $23.40
$26.50 - $27.44 61,400 5.8 years $27.08 48,900 $27.05
$27.63 - $27.75 116,000 5.4 years $27.73 91,000 $27.73
$27.88 366,500 4.3 years $27.88 366,500 $27.88
$28.25 - $30.00 38,000 8.8 years $28.91 9,666 $28.93
$30.25 - $31.75 788,250 7.8 years $31.41 399,375 $31.41
$32.88 - $37.00 407,914 8.1 years $32.69 104,764 $32.69
----------- -----------
3,244,664 1,046,205
=========== ===========
A summary of SAR transactions is as follows:
Officers and Key Employees
Price Range
Shares Per Share
--------- ---------------
Outstanding February 29, 1998 ................... 1,657,988 $21.88 - $65.13
Cancelled or expired ........................... (388,625) 27.45 - 46.38
Exercised ...................................... (89,644) 21.88 - 27.25
--------- ---------------
Outstanding February 27, 1999 ................... 1,179,719 $21.88 - $65.13
Cancelled or expired ........................... (212,250) 23.38 - 65.13
Exercised ...................................... (84,707) 21.88 - 27.25
--------- ---------------
Outstanding February 26, 2000 ................... 882,762 $21.88 - $52.38
Cancelled or expired ........................... (375,000) 24.75 - 52.38
--------- ---------------
Outstanding February 24, 2001 ................... 507,762 $21.88 - $45.38
========= ===============
Exercisable at:
February 26, 2000 .............................. 866,137 $21.88 - $52.38
February 24, 2001 .............................. 506,512 $21.88 - $45.38
Note 11--Litigation
On January 13, 2000, the Attorney General of the State of New York filed an
action in New York Supreme Court, County of New York, alleging that the
Company and its subsidiary Shopwell, Inc., together with the Company's outside
delivery service Chelsea Trucking, Inc., violated New York law by failing to
pay minimum and overtime wages to individuals who deliver groceries at a Food
Emporium store in New York City. The complaint seeks a determination of
violation of law, an unspecified amount of restitution, an injunction and
costs. A purported class action lawsuit was filed on January 13, 2000 in the
federal district court for the Southern District of New York against the
Company, Shopwell, Inc. and others by Faty Ansoumana and others. The federal
court action makes similar minimum wage and overtime pay allegations under
both federal and state law and extends the allegations to various stores
operated by the Company. In
F-38
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 11--Litigation -- (Continued)
December 2000, the plaintiffs in the federal court action accepted a $3
million offer of judgment made by the Company, such offer being conditional
upon the federal court entering an order certifying a class consisting of the
individuals who are the subject of a pending motion by the plaintiffs for
class certification. Such amount has been accrued for and is included in
"Other accruals" on the Company's Consolidated Balance Sheets. In the event
the Court enters the class certification order, this judgment will also
resolve all related claims of the New York Attorney General.
The Company is subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management
does not believe that the outcome of any of these legal matters will have a
material adverse effect on the Company's consolidated results of operations,
financial position or cash flows.
Note 12--Supply Chain and Business Process Initiative--Great Renewal--Phase II
On March 13, 2000, the Company announced GR II, an initiative to develop a
state-of-the-art supply and business management infrastructure. As of February
24, 2001, the Company has committed to, but has not yet incurred,
approximately $23 million of software purchases and consulting services, which
will be payable in fiscal 2001.
During fiscal 2000, an agreement was entered into which provides financing
for software purchases and hardware leases primarily relating to GR II.
Presently, software purchases and hardware leases will be financed at an
effective rate of 8.49% per annum. Software purchases and hardware leases will
occur from time to time over the next four years. Equal monthly payments of
$1.4 million are currently being made. Such payments are subject to change
based upon the timing and amount of such funding. As of February 24, 2001,
$26.8 million was funded for software purchases and hardware with a total fair
market value of $10.7 million had been leased. The leasing of the hardware
under this agreement is being accounted for as an operating lease in
accordance with SFAS No. 13, "Accounting for Leases".
Note 13--Operating Segments
During the fourth quarter of fiscal 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). This statement establishes standards for reporting information about
operating segments in annual financial statements and selected information in
interim financial statements. It also establishes standards for related
disclosures about products and services and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. The Company's chief operating decision maker is the
Chief Executive Officer.
The Company currently operates in three reportable segments: United States
Retail, Canada Retail and Canada Wholesale. The retail segments are comprised
of retail supermarkets in the United States and Canada, while the Wholesale
segment is comprised of the Company's Canadian operation that serves as
exclusive wholesaler to the Company's franchised stores and serves as
wholesaler to certain third party retailers.
The accounting policies for the segments are the same as those described in
the summary of significant accounting policies. The Company measures segment
performance based upon operating profit.
F-39
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 13--Operating Segments -- (Continued)
Information on segments is as follows:
52 Weeks Ended
-------------------------------------------
February 24, February 26, February 27,
2001 2000 1999
----------- ----------- -----------
Sales
U.S. Retail........................................................................ $ 8,247,224 $ 7,981,134 $ 8,276,493
Canada Retail...................................................................... 1,745,129 1,646,712 1,515,602
Canada Wholesale................................................................... 630,513 523,488 387,263
----------- ----------- -----------
Total Company.................................................................... $10,622,866 $10,151,334 $10,179,358
=========== =========== ===========
Depreciation and amortization
U.S. Retail........................................................................ $ 223,550 $ 204,975 $ 209,656
Canada Retail...................................................................... 32,221 27,413 23,990
Canada Wholesale................................................................... -- 324 17
----------- ----------- -----------
Total Company $ 255,771 $ 232,712 $ 233,663
=========== =========== ===========
Income (loss) from operations
U.S. Retail........................................................................ $ 6,866 $ 69,703 $ (186,558)
Canada Retail...................................................................... 19,676 17,029 11,317
Canada Wholesale................................................................... 23,651 18,098 10,850
----------- ----------- -----------
Total Company.................................................................... $ 50,193 $ 104,830 $ (164,391)
=========== =========== ===========
F-40
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 13--Operating Segments -- (Continued)
52 Weeks Ended
-------------------------------------------
February 24, February 26, February 27,
2001 2000 1999
---------- ---------- ----------
Interest expense
U.S. Retail........................................................................ $ (81,684) $ (70,097) $ (58,389)
Canada Retail...................................................................... (11,436) (11,504) (11,485)
Canada Wholesale................................................................... (2,968) (2,444) (1,623)
---------- ---------- ----------
Total Company.................................................................... $ (96,088) $ (84,045) $ (71,497)
========== ========== ==========
Interest income
U.S. Retail........................................................................ $ 50 $ 317 $ 876
Canada Retail...................................................................... 2,099 2,521 2,686
Canada Wholesale................................................................... 4,073 3,380 3,042
---------- ---------- ----------
Total Company.................................................................... $ 6,222 $ 6,218 $ 6,604
========== ========== ==========
(Loss) income before income taxes
U.S. Retail........................................................................ $ (74,768) $ (77) $ (244,071)
Canada Retail...................................................................... 10,339 8,046 2,518
Canada Wholesale................................................................... 24,756 19,034 12,269
---------- ---------- ----------
Total Company.................................................................... $ (39,673) $ 27,003 $ (229,284)
========== ========== ==========
Capital expenditures
U.S. Retail........................................................................ $ 356,850 $ 416,863 $ 376,688
Canada Retail...................................................................... 58,992 61,444 61,657
Canada Wholesale................................................................... -- 1,265 --
---------- ---------- ----------
Total Company.................................................................... $ 415,842 $ 479,572 $ 438,345
========== ========== ==========
Total assets
U.S. Retail........................................................................ $2,679,217 $2,684,624 $2,601,113
Canada Retail...................................................................... 548,801 567,573 504,926
Canada Wholesale................................................................... 81,785 83,328 54,775
---------- ---------- ----------
Total Company.................................................................... $3,309,803 $3,335,525 $3,160,814
========== ========== ==========
Long-lived assets
United States...................................................................... $1,637,036 $1,652,094 $1,528,249
Canada............................................................................. 287,211 265,818 204,687
---------- ---------- ----------
Total Company.................................................................... $1,924,247 $1,917,912 $1,732,936
========== ========== ==========
Note 14--Sale-Leaseback Transaction
On December 29, 2000 and February 16, 2001, the Company sold 12 properties
and simultaneously leased them back from the purchaser. The properties subject
to this sale had a carrying value of approximately $68 million. Net proceeds
received by the Company related to this transaction amounted to approximately
$113 million. Of the 12 properties sold, 11 were sold for a profit resulting
in a gain after deducting expenses of approximately $46 million. This gain
will be deferred and amortized over the life of the respective leases as a
reduction of rental expense. One property in the aforementioned transaction
was sold at a loss of approximately $3 million after expenses. Since the fair
value of this property was less than its carrying value, the Company
recognized this loss in full during fiscal 2000. During fiscal 2001, the
Company has or expects to enter into similar transactions with six other owned
properties. During fiscal 2000,
F-41
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts, and where noted)
Note 14--Sale-Leaseback Transaction -- (Continued)
the Company recognized a loss of approximately $4 million related to one of
these additional sale-leaseback properties which has occurred since the
carrying value of such property exceeded its fair value.
The resulting leases of the 12 properties sold in fiscal 2000 have terms of
20 years, with options to renew for additional periods, and are being
accounted for as operating leases in accordance with SFAS No. 13, "Accounting
for Leases". Future minimum lease payments for these operating leases are as
follows:
Fiscal
------
2001................................................................ $ 12,840
2002................................................................ 12,840
2003................................................................ 12,840
2004................................................................ 12,840
2005................................................................ 12,840
2006 and thereafter................................................. 204,963
--------
Total.............................................................. $269,163
========
Note 15--Environmental Liability
During the first quarter of fiscal 2000, the Company became aware of
environmental issues at one of its non-retail real estate locations. The
Company obtained an environmental remediation report to enable it to assess
the potential environmental liability related to this property. Factors
considered in determining the liability included, among others, whether the
Company had been designated as a potentially responsible party, the number of
potentially responsible parties designated at the site, the stage of the
proceedings and the available environmental technology.
During the first quarter of fiscal 2000, the Company assessed the likelihood
that a loss had been incurred at this site as probable and based on findings
included in remediation reports and discussion with legal counsel, estimated
the potential loss to be approximately $3 million on an undiscounted basis.
Accordingly, such amount was accrued at that time. At each balance sheet date
the Company assesses its exposure with respect to this environmental
remediation based on current available information. Subsequently, during
fiscal 2000, with respect to such review, it was determined that additional
costs amounting to approximately $1.3 million would be incurred to remedy
these environmental issues, and accordingly, this additional amount was
accrued. The total accrued liability of approximately $4.3 million is included
in "Other non-current liabilities" in the Consolidated Balance Sheets.
F-42
$550,000,000
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
Common Stock
Preferred Stock
Depositary Shares
Debt Securities
Securities Warrants
and
Preferred Trust Securities Guaranties
A&P FINANCE I
A&P FINANCE II
A&P FINANCE III
Preferred Trust Securities
The Great Atlantic & Pacific Tea Company, Inc. may offer, from time to time,
o shares of its common stock,
o shares of its preferred stock,
o shares of its preferred stock represented by depositary shares,
o unsecured senior debt securities,
o unsecured subordinated debt securities,
o warrants to purchase shares of its common stock, and
o warrants to purchase debt securities.
A&P Finance I, A&P Finance II and A&P Finance III may offer, from time to
time, preferred trust securities. A&P will own all of the common securities of
each of the trusts. The trusts exist solely for the purpose of issuing
preferred trust securities and investing the proceeds therefrom in junior
subordinated debt securities of A&P. A&P expects to guarantee distributions
and liquidation payments on the preferred trust securities. However, any
preferred trust securities guaranty will only apply to the extent that the
trust issuing the preferred trust securities has funds available to make
payments with respect to the preferred trust securities.
The securities
o will have a maximum aggregate offering price of $550,000,000,
o will be offered at prices and on terms to be set forth in an accompanying
prospectus supplement,
o may be denominated in U.S. dollars or in other currencies or currency
units,
o may be offered separately or together, or in separate series, and
o may be listed on a national securities exchange, if specified in an
accompanying prospectus supplement.
The senior debt securities, if issued, will rank equally with all other
unsecured and unsubordinated indebtedness of A&P. The subordinated debt
securities, if issued, will be unsecured and subordinated to all present and
future senior indebtedness specified in an accompanying prospectus supplement.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
----------------
The securities may be sold directly, through agents from time to time or
through underwriters and/or dealers. If any agent of the issuers or any
underwriter is involved in the sale of the securities, the name of such agent
or underwriter and any applicable commission or discount will be set forth in
the accompanying prospectus supplement.
----------------
This prospectus may not be used unless accompanied by a prospectus supplement.
----------------
The date of this prospectus is June 21, 1999.
TABLE OF CONTENTS
Page
----
Where You Can Find More Information ..................................... 3
Incorporation of Certain Documents by Reference ......................... 3
The Company ............................................................. 4
The Trusts .............................................................. 4
Use of Proceeds ......................................................... 5
Ratio of Earnings to Fixed Charges ...................................... 5
Description of Common Stock ............................................. 5
Description of Preferred Stock .......................................... 6
Description of Depositary Shares ........................................ 11
Description of Debt Securities .......................................... 14
Description of Securities Warrants ...................................... 21
Description of Preferred Trust Securities ............................... 23
Description of Preferred Trust Securities Guaranties .................... 24
Description of Junior Subordinated Debt Securities ...................... 26
Relationship among the Preferred Trust Securities, the Junior
Subordinated Debt Securities and the Preferred Trust
Securities Guaranties.................................................. 28
Maryland Anti-Takeover Provisions ....................................... 29
Plan of Distribution .................................................... 30
Legal Matters ........................................................... 31
Experts ................................................................. 31
2
WHERE YOU CAN FIND MORE INFORMATION
A&P and the trusts filed with the Securities and Exchange Commission a
registration statement on Form S-3 under the Securities Act of 1933 with
respect to the securities to be offered. This prospectus, which forms a part
of the registration statement, does not contain all of the information set
forth in the registration statement and the exhibits and schedules thereto,
parts of which are omitted in accordance with the rules and regulations of the
Commission. For more information about A&P, the trusts and the securities, you
should see the registration statement and its exhibits and schedules. Any
statement made in this prospectus concerning the provisions of documents may
be incomplete and you should refer to the copy of such document filed as an
exhibit to the registration statement with the Commission.
A&P files annual, quarterly and special reports, proxy statements and other
information with the Commission. The registration statement, its exhibits and
such reports, proxy statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: New York Regional Office, Seven
World Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional
Office, Citicorp Center, 500 West Madison Street, 14th Floor, Chicago,
Illinois 60601. Copies of such material can be obtained from the Public
Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission also maintains an
Internet Web Site at http://www.sec.gov that contains reports and other
information. A&P's common stock is traded on the New York Stock Exchange under
the symbol "GAP" and reports, proxy statements and other information
concerning A&P can be inspected at the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
The issuers have not filed separate financial statements of the trusts. All
of the common securities of the trusts are owned by A&P and the trusts have no
operating history or independent operations. In addition, following the
issuance of preferred trust securities, the issuing trusts will not engage in
any activity other than holding as trust assets junior subordinated debt
securities of A&P. In connection with any issuance of preferred trust
securities, A&P will, through one or more preferred trust securities
guaranties or other agreements, irrevocably and unconditionally guarantee
payments on the preferred trust securities. For these reasons, the issuers do
not think that the financial statements of any of the trusts would be material
to prospective purchasers of the preferred trust securities.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
A&P is incorporating by reference into this registration statement its
Annual Report on Form 10-K for the fiscal year ended February 27, 1999.
All documents filed by A&P pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act: (1) subsequent to the initial filing of this prospectus and
prior to the date it is declared effective; and (2) subsequent to the date of
this prospectus and prior to the termination of this offering are incorporated
by reference and become a part of this prospectus from their date of filing.
Any statement contained in this prospectus or in a document incorporated by
reference is modified or superseded for purposes of this prospectus to the
extent that a statement contained in any such subsequent document modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this prospectus.
On request, the issuers will provide anyone who receives a copy of this
prospectus with a copy of any or all of the documents incorporated in this
prospectus by reference. Written or telephone requests for such copies should
be directed to Robert G. Ulrich, Esq., Senior Vice President, General Counsel
and Secretary, at A&P's principal office: The Great Atlantic & Pacific Tea
Company, Inc., 2 Paragon Drive, Montvale, New Jersey 07645, telephone (201)
573-9700.
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not
authorized anyone else to provide you with different information. We are not
making an offer of the securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus or
any prospectus supplement is accurate as of any date other than the date on
the front of those documents.
3
THE COMPANY
A&P has been engaged in the retail food business since 1859. Based on
reported sales for fiscal 1998, A&P believes that as of the end of its 1998
fiscal year it was one of the ten largest retail food chains in the United
States and that it had the largest market share in metropolitan New York and
Detroit and the second largest in the Province of Ontario. As of the end of
its 1998 fiscal year, A&P operated 839 stores averaging approximately 35,200
square feet per store. In addition, in fiscal 1995 A&P began franchising
certain stores in Canada under its Food Basics format, which focuses its
appeal toward the more price conscious consumer. As of the end of its 1998
fiscal year, A&P had franchised 55 Food Basics stores in Canada.
A&P sells groceries, meats, fresh produce and other items commonly offered
in supermarkets, operating under the following trade names:
o Super Fresh o Sav-A-Center
o Farmer Jack o Kohl's
o Food Emporium o Waldbaum's
o Super Food Mart o Ultra Mart
o Dominion o Food Basics
In addition, many stores have bakery, delicatessen, pharmacy, floral, fresh
fish and cheese departments, and on-site banking. National, regional and local
brands are sold as well as private label merchandise under brands which
include America's Choice, Master Choice, Health Pride, Savings Plus and The
Farm. In support of its retail operations, A&P also operates one coffee
roasting plant in the United States. Through its Compass Foods Division, A&P
manufactures and distributes a line of whole bean coffees under the Eight
O'Clock, Bokar and Royale labels, for sale through its own stores as well as
other food and convenience retailers.
Building upon a broad base of A&P supermarkets, A&P has expanded and
diversified within the retail food business through the acquisition of other
supermarket chains and the development of several alternative store types. A&P
now operates its stores with merchandise, pricing and identities tailored to
appeal to different segments of the market, including buyers seeking gourmet
and ethnic foods, unusual produce, a wide variety of premium quality private
label goods and health and beauty aids along with the array of traditional
grocery products.
A&P is engaged in a continuing program of modernizing its operations and
retail stores. During fiscal 1998, A&P expended approximately $438 million for
capital projects which included 46 new supermarkets, 3 new Food Basics
franchised stores and 69 remodels or enlargements. A&P's plans for fiscal 1999
anticipate capital expenditures of approximately $500 million, which include
the opening of 55 new supermarkets and the remodeling or expansion of 75
stores. In addition, A&P is developing plans to open approximately 65 new
supermarkets in fiscal 2000 and approximately 70 to 80 new supermarkets per
year thereafter for several years. Further, A&P expects to remodel or enlarge
an average of 75 stores per year for the next several years.
As of May 1, 1999, A&P was 54.92% owned by Tengelmann
Warenhandelsgesellschaft, a general retailer headquartered in Germany which is
one of the largest food retailers in Europe. The principal executive offices
of A&P are located at 2 Paragon Drive, Montvale, New Jersey 07645, telephone
(201) 573-9700.
THE TRUSTS
Each trust is a statutory business trust created under Delaware law for the
exclusive purpose of issuing and selling its preferred trust securities and
using the proceeds to acquire corresponding junior subordinated debt
securities issued by A&P. Each trust will be governed by an amended and
restated trust agreement substantially in the form filed as an exhibit to the
registration statement of which this prospectus forms a part. Each trust
agreement will be qualified as an indenture under the Trust Indenture Act of
1939. All of the common securities of each trust will be owned by A&P.
Each trust's business and affairs will be conducted by its trustees, which
shall be appointed by A&P as the holder of the trust's common securities. The
trustees will include two officers of A&P as administrative trustees, Bankers
Trust Company as property trustee, and Bankers Trust (Delaware) as Delaware
trustee. The
4
property trustee of each trust will act as the indenture trustee with respect
to such trust for purposes of compliance with the provisions of the Trust
Indenture Act.
A&P will pay all fees and expenses related to each trust and the offering of
preferred trust securities and will pay, directly or indirectly all ongoing
costs, expenses and liabilities of each trust.
The principal place of business of each trust shall be c/o The Great
Atlantic & Pacific Tea Company, Inc., 2 Paragon Drive, Montvale, New Jersey
07645, telephone (201) 573-9700.
You should see the prospectus supplement relating to the preferred trust
securities of a trust for further information concerning such trust.
USE OF PROCEEDS
Except as otherwise described in the accompanying prospectus supplement, the
net proceeds to A&P from the sale or sales of the securities will be used for
general corporate purposes, which may include, without limitation, the
reduction of outstanding indebtedness, working capital increases, capital
expenditures and acquisitions. The net proceeds of the sale of preferred trust
securities of each trust will be invested in a related series of A&P's junior
subordinated debt securities.
RATIO OF EARNINGS TO FIXED CHARGES
February 27, 1999 February 28, 1998 February 22, 1997 February 24, 1996 February 25, 1995
(52 weeks) (53 weeks) (52 weeks) (52 weeks) (52 weeks)
----------------- ----------------- ----------------- ----------------- -----------------
* 1.58x 1.77x 1.64x *
- ---------------
* Earnings for the year ended February 27, 1999 and February 25, 1995 were
inadequate to cover fixed charges by $229.3 million and $129.4 million,
respectively.
In the calculation of A&P's ratio of earnings to fixed charges, earnings
consist of income (loss) before income taxes and cumulative effect on prior
years of changes in accounting principles, plus fixed charges. Fixed charges
consist of interest expense, plus the portion of rental expense under leases
which has been deemed by A&P to be representative of the interest factor.
DESCRIPTION OF COMMON STOCK
A&P's Articles of Restatement of the Certificate of Incorporation authorize
the issuance of 80 million shares of its common stock with a par value of
$1.00 per share. As of May 18, 1999, there were 38,290,716 shares of common
stock outstanding held by approximately 7,500 holders of record, excluding
holders whose shares of record are held by brokers.
General
The holders of common stock are entitled to cast one vote for each share on
all matters submitted to a vote of stockholders and are not entitled to
cumulate votes for the election of directors. Except in cases in which it is
by statute, by the Articles or by the bylaws of A&P otherwise provided, a
majority of the shares present in person or by proxy is sufficient to elect
and pass any measure. Amendments to the Articles, mergers, consolidations,
share exchanges and the dissolution of A&P generally require the approval of
two-thirds of the outstanding shares of common stock.
There are no redemption or sinking fund provisions applicable to the common
stock. The holders of the common stock are not subject to further calls or
assessments by A&P. In the event of liquidation, holders of common stock are
entitled to share in the distribution of assets remaining after payment of
debts, liquidation preference of any outstanding preferred stock, and
expenses. The holders of common stock are entitled to receive dividends when
and as declared by the board of directors out of funds legally available
therefor. The outstanding shares of common stock and the shares of common
stock to be distributed in connection with any offerings pursuant to this
prospectus will be fully paid and nonassessable when issued.
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Preemptive Rights
The holders of common stock have preemptive rights to subscribe for and to
purchase additional shares of stock of any class or classes of A&P, provided,
however, that no preemptive right shall in any event accrue to any stockholder
with respect to
(1) shares issued for not less than their fair value in exchange for
services or property other than money,
(2) shares remaining unsubscribed after having been offered to
stockholders,
(3) treasury shares sold for not less than their fair value,
(4) shares issued or issuable pursuant to articles of merger,
(5) preferred shares without then present voting power with respect to the
election of directors issued for not less than their fair value, and
(6) shares issued and sold to A&P's officers or other employees or to the
officers or other employees of any subsidiary of A&P upon such terms
and conditions as are approved by the affirmative vote of a majority of
all of the shares entitled to vote with respect thereto at a meeting
duly called and held for such purpose.
The determination of "fair value" fixed and recorded in a resolution of the
board of directors authorizing the issuance of any such additional shares of
stock, including the price or consideration for which such shares of stock are
to be issued, shall be conclusive in the absence of fraud or gross disparity
in such determination.
Transfer Agent
American Stock Transfer and Trust Company, 40 Wall Street, New York, NY
10005, is the transfer agent and registrar for the common stock.
DESCRIPTION OF PREFERRED STOCK
A&P's Articles authorize the issuance of 3 million shares of its preferred
stock without par value. No shares of preferred stock are currently
outstanding.
General
The preferred stock may be issued from time to time, in one or more series,
as authorized by the board of directors. Prior to issuance of shares of each
series, the board of directors is required by the Maryland General Corporation
Law and the Articles to fix for each series, the designations, preferences,
rights, voting powers, restrictions, and qualifications of, the dividends on,
the times and prices of redemptions of, and the conversion rights of the
shares of such series as may be permitted by Maryland law. Such rights,
powers, restrictions and limitations could include the right to receive
specified dividend payments and payments on liquidation prior to any such
payments to holders of common stock or other stock of A&P ranking junior to
the preferred stock. Shares of preferred stock to be distributed in connection
with any offerings pursuant to this prospectus will be fully paid and
nonassessable when issued and the holders of shares of any such preferred
stock will not have any preemptive right to subscribe or purchase any new or
additional issue of shares of stock of A&P. The board of directors could
authorize the issuance of shares of preferred stock with terms and conditions
that could have the effect of discouraging a takeover or other transaction
that holders of common stock might believe to be in their best interests or in
which holders of some, or a majority, of the shares of common stock might
receive a premium for their shares over the then market price of such shares
of common stock.
Future Series of Preferred Stock
The following description of the preferred stock sets forth material terms
and provisions of the preferred stock which may be specified in a prospectus
supplement. The statements below describing the preferred stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of
6
the Articles and bylaws and any applicable designating amendment to the
Articles establishing the terms of a series of preferred stock.
You should read the prospectus supplement relating to the preferred stock
offered thereby for specific terms, including:
1. The title and stated capital value of such preferred stock;
2. The number of shares of such preferred stock offered, the liquidation
preference per share and the offering price of such preferred stock;
3. The dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to such preferred stock;
4. The date from which dividends on such preferred stock shall
accumulate, if applicable;
5. The procedures for any auction and remarketing, if any, for such
preferred stock;
6. The provision for a sinking fund, if any, for such preferred stock;
7. The provision for redemption, if applicable, of such preferred stock;
8. Any listing of such preferred stock on any securities exchange;
9. The terms and conditions, if applicable, upon which such preferred
stock will be convertible into common stock, including the conversion
price or manner of its calculation;
10. Any other specific terms, preferences, rights, limitations or
restrictions of such preferred stock;
11. A discussion of federal income tax considerations applicable to such
preferred stock;
12. The voting rights of such preferred stock and the relative ranking and
preference of such preferred stock as to dividend rights and rights
upon liquidation, dissolution or winding up of the affairs of A&P; and
13. Any limitations on issuance of any series of preferred stock ranking
senior to or on a parity with such series of preferred stock as to
dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of A&P.
Rank
Unless otherwise specified in the prospectus supplement, the preferred stock
will, with respect to dividend rights and rights upon liquidation, dissolution
or winding up of A&P, rank
(1) senior to all classes or series of common stock, and to all equity
securities ranking junior to such preferred stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up
of A&P;
(2) on a parity with all equity securities issued by A&P the terms of
which specifically provide that such equity securities rank on a
parity with the preferred stock with respect to dividend rights or
rights upon liquidation, dissolution or winding up of A&P; and
(3) junior to all equity securities issued by A&P the terms of which
specifically provide that such equity securities rank senior to the
preferred stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of A&P.
The term "equity securities" does not include convertible debt securities.
Dividends
Holders of the preferred stock of each series will be entitled to receive,
when, as and if declared by the board of directors, out of assets of A&P
legally available for payment, cash dividends at such rates and on such dates
as will be set forth in the applicable prospectus supplement. Each such
dividend shall be payable
7
to holders of record as they appear on the share transfer books of A&P on such
record dates as shall be fixed by the board of directors.
Dividends on any series of the preferred stock may be cumulative or non-
cumulative, as provided in the applicable prospectus supplement. Dividends, if
cumulative, will be cumulative from and after the date set forth in the
applicable prospectus supplement. If the board of directors fails to declare a
dividend payable on a dividend payment date on any series of the preferred
stock for which dividends are non-cumulative, then the holders of such series
of the preferred stock will have no right to receive a dividend in respect of
the dividend period ending on such dividend payment date, and A&P will have no
obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
date.
If preferred stock of any series is outstanding, no dividends will be
declared or paid or set apart for payment on any stock of A&P of any other
series ranking, as to dividends, on a parity with or junior to the preferred
stock of such series for any period unless
(1) if a series of preferred stock has a cumulative dividend, full
cumulative dividends have been declared and paid or declared and a sum
sufficient for the payment thereof is set apart for payment for all
past dividend periods and the then current dividend period, or
(2) if a series of preferred stock does not have a cumulative dividend,
full dividends for the then current dividend period have been declared
and paid or declared and a sum sufficient for the payment thereof is
set apart for such payment for the then current dividend period.
When dividends upon preferred stock of any series and the shares of any other
series of preferred stock ranking on a parity as to dividends are not paid in
full, or a sum sufficient for such full payment is not set apart, all
dividends declared upon preferred stock of such series and any other series of
preferred stock ranking on a parity as to dividends shall be declared pro
rata. No interest, or sum of money in lieu of interest, shall be payable in
respect of any dividend payment or payments on preferred stock of such series
which may be in arrears.
Except as provided in the immediately preceding paragraph, unless
(1) if a series of preferred stock has a cumulative dividend, full
cumulative dividends have been declared and paid or declared and a sum
sufficient for the payment thereof is set apart for payment for all
past dividend periods and the then current dividend period, and
(2) if a series of preferred stock does not have a cumulative dividend,
full dividends have been declared and paid or declared and a sum
sufficient for the payment thereof is set apart for payment for the
then current dividend period,
no dividends, other distributions or payments for redemption or purchase,
other than in shares of common stock or other shares of stock ranking junior
to the preferred stock of such series as to dividends and upon liquidation,
shall be declared or paid or set aside for payment with respect to A&P's
common stock or any other stock of A&P ranking junior to or on parity with
such series of preferred stock.
Any dividend payment made on shares of a series of preferred stock shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series which remains payable.
Redemption
If so provided in the applicable prospectus supplement, the preferred stock
will be subject to mandatory redemption or redemption at the option of A&P, as
a whole or in part, in each case upon the terms, at the times and at the
redemption prices set forth in such prospectus supplement.
The prospectus supplement relating to a series of preferred stock that is
subject to mandatory redemption will specify the number of shares of such
preferred stock that shall be redeemed by A&P in each year commencing after a
date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon to
the date of redemption. If such preferred stock does not have a cumulative
dividend, accrued and unpaid dividends will not include any accumulation in
8
respect of unpaid dividends for prior dividend periods. The redemption price
may be payable in cash or other property, as specified in the applicable
prospectus supplement. If the redemption price for preferred stock of any
series is payable only from the net proceeds of the issuance of shares of
stock of A&P, the terms of such preferred stock may provide that, if no such
shares of stock shall have been issued or to the extent the net proceeds from
any issuance are insufficient to pay in full the aggregate redemption price
then due, such preferred stock shall automatically and mandatorily be
converted into the applicable shares of stock of A&P pursuant to conversion
provisions specified in the applicable prospectus supplement.
Notwithstanding the foregoing, unless
(1) if a series of preferred stock has a cumulative dividend, full
cumulative dividends on all shares of such series of preferred stock
shall have been declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for all past dividend
periods and the then current dividend period, and
(2) if a series of preferred stock does not have a cumulative dividend,
full dividends on all shares of preferred stock of such series have
been declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for the then current dividend
period,
no shares of such series of preferred stock shall be redeemed unless all
outstanding shares of preferred stock of a series are simultaneously redeemed.
The foregoing, however, shall not prevent the purchase or acquisition of
preferred stock of a series pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding shares of preferred stock of such
series. In addition, unless
(1) if such series of preferred stock has a cumulative dividend, full
cumulative dividends on all shares of such series of preferred stock
have been declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for all past dividend periods
and the then current dividend period, and
(2) if such series of preferred stock does not have a cumulative dividend,
full dividends on all shares preferred stock of such series have been
declared and paid or declared and a sum sufficient for the payment
thereof set apart for payment for the then current dividend period,
A&P shall not purchase or otherwise acquire directly or indirectly any shares
of preferred stock of such series, except by conversion into or exchange for
shares of stock of A&P ranking junior to the preferred stock of such series as
to dividends and upon liquidation. The foregoing, however, shall not prevent
the purchase or acquisition of shares of preferred stock of a series pursuant
to a purchase or exchange offer made on the same terms to holders of all
outstanding shares of preferred stock of such series.
If fewer than all of the outstanding shares of preferred stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
A&P and such shares may be redeemed pro rata or by any other equitable manner
determined by A&P.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of preferred stock of
any series to be redeemed at the address shown on the stock transfer books of
A&P. Each notice shall state:
(1) the redemption date;
(2) the number of shares and series of the preferred stock to be redeemed;
(3) the redemption price;
(4) the place or places where certificates for such preferred stock are to
be surrendered for payment of the redemption price;
(5) that dividends on the shares to be redeemed will cease to accrue on
such redemption date; and
(6) the date upon which the holder's conversion rights, if any, as to such
shares shall terminate.
If fewer than all the shares of preferred stock of any series are to be
redeemed, the notice mailed to each such holder thereof shall also specify the
number of shares of preferred stock to be redeemed from each such
9
holder. If notice of redemption of any preferred stock has been given and if
the funds necessary for such redemption have been set aside by A&P in trust
for the benefit of the holders of any preferred stock so called for
redemption, then from and after the redemption date dividends will cease to
accrue on such preferred stock, and all rights of the holders of such shares
will terminate, except the right to receive the redemption price.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of A&P, before any distribution or payment shall be made to the
holders of any common stock or any other class or series of stock of A&P
ranking junior to the preferred stock in the distribution of assets upon any
liquidation, dissolution or winding up of A&P, the holders of each series of
preferred stock shall be entitled to receive out of assets of A&P legally
available for distribution to stockholders liquidating distributions in the
amount of the liquidation preference per share, if any, set forth in the
applicable prospectus supplement, plus an amount equal to all dividends
accrued and unpaid thereon, which shall not include any accumulation in
respect of unpaid noncumulative dividends for prior dividend periods. After
payment of the full amount of the liquidating distributions to which they are
entitled, the holders of preferred stock will have no right or claim to any of
the remaining assets of A&P. In the event that, upon any such voluntary or
involuntary liquidation, dissolution or winding up, the available assets of
A&P are insufficient to pay the amount of the liquidating distributions on all
outstanding shares of preferred stock and the corresponding amounts payable on
all shares of other classes or series of stock of A&P ranking on a parity with
the preferred stock in the distribution of assets, then the holders of the
preferred stock and all other such classes or series of stock shall share
ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
If liquidating distributions shall have been made in full to all holders of
preferred stock, the remaining assets of A&P shall be distributed among the
holders of any other classes or series of stock ranking junior to the
preferred stock upon liquidation, dissolution or winding up, according to
their respective rights and preferences and in each case according to their
respective number of shares. For such purposes, the consolidation or merger of
A&P with or into any other corporation, trust or entity, or the sale, lease or
conveyance of all or substantially all of the property or business of A&P,
shall not be deemed to constitute a liquidation, dissolution or winding up of
A&P.
Voting Rights
Holders of the preferred stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable prospectus supplement.
Unless provided otherwise for any series of preferred stock, so long as any
shares of preferred stock of a series remain outstanding, A&P will not,
without the affirmative vote or consent of the holders of at least two-thirds
of the shares of such series of preferred stock outstanding at the time,
(1) authorize or create, or increase the authorized or issued amount of,
any class or series of stock ranking prior to such series of preferred
stock with respect to payment of dividends or the distribution of
assets upon liquidation, dissolution or winding up, or reclassify any
authorized stock of A&P into such shares, or create, authorize or
issue any obligation or security convertible into or evidencing the
right to purchase any such shares, or
(2) amend, alter or repeal the provisions of the Articles or the
designating amendment for such series of preferred stock, whether by
merger, consolidation or otherwise, so as to materially and adversely
affect any right, preference, privilege or voting power of such series
of preferred stock or the holders thereof.
So long as the preferred stock remains outstanding with the terms thereof
materially unchanged, taking into account that A&P may not be the surviving
entity, the occurrence of any merger, consolidation or other similar event
will not be deemed to materially and adversely affect the rights, preferences,
privileges or voting power of holders of preferred stock. Any increase in the
amount of the authorized preferred stock or
10
the creation or issuance of any other series of preferred stock, or any
increase in the amount of authorized shares of such series or any other series
of preferred stock, in each case ranking on a parity with or junior to the
preferred stock of such series with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, also will
not be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of preferred stock shall
have been redeemed or called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
Conversion Rights
The terms and conditions, if any, upon which any series of preferred stock
is convertible into common stock will be set forth in the applicable
prospectus supplement relating thereto. Such terms will include the number of
shares of common stock into which the shares of preferred stock are
convertible, the conversion price or manner of its calculation, the conversion
period, provisions as to whether conversion will be at the option of the
holders of the preferred stock or A&P, the events requiring an adjustment of
the conversion price and provisions affecting conversion in the event of the
redemption of such series of preferred stock.
Transfer Agent
The transfer agent and registrar for the preferred stock will be set forth
in the applicable prospectus supplement.
DESCRIPTION OF DEPOSITARY SHARES
A&P may, at its option, elect to offer depositary shares rather than full
shares of preferred stock. In the event such option is exercised, each of the
depositary shares will represent ownership of and entitlement to all rights
and preferences of a fraction of a share of preferred stock of a specified
series, including dividend, voting, redemption and liquidation rights. The
applicable fraction will be specified in the prospectus supplement. The shares
of preferred stock represented by the depositary shares will be deposited with
a depositary named in the applicable prospectus supplement, under a deposit
agreement among A&P, the depositary and the holders of depositary receipt
certificates evidencing depositary shares. Depositary receipts will be
delivered to those persons purchasing depositary shares in the offering. The
depositary will be the transfer agent, registrar and dividend disbursing agent
for the depositary shares. Holders of depositary receipts agree to be bound by
the deposit agreement, which requires holders to take actions described in an
accompanying prospectus supplement such as filing proof of residence and
paying certain charges.
The summary of terms of the depositary shares contained in this prospectus
does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the deposit agreement, the Articles and the
form of designating amendment for the applicable series of preferred stock.
Dividends
The depositary will distribute all cash dividends or other cash
distributions received in respect of the series of preferred stock represented
by the depositary shares to the record holders of depositary receipts in
proportion to the number of depositary shares owned by such holders on the
relevant record date, which will be the same date as the record date fixed by
A&P for the applicable series of preferred stock. The depositary, however,
will distribute only such amount as can be distributed without attributing to
any depositary share a fraction of one cent, and any balance not so
distributed will be added to and treated as part of the next sum received by
the depositary for distribution to record holders of depositary receipts then
outstanding.
In the event of a distribution other than in cash, the depositary will
distribute property received by it to the record holders of depositary
receipts entitled thereto, in proportion, as nearly as may be practicable, to
the number of depositary shares owned by such holders on the relevant record
date, unless the depositary determines, after consultation with A&P, that it
is not feasible to make such distribution, in which case the
11
depositary may, with the approval of A&P, adopt any other method for such
distribution as it deems equitable and appropriate, including the sale of such
property and distribution of the net proceeds from such sale to such holders.
Liquidation Preference
In the event of the liquidation, dissolution or winding up of the affairs of
A&P, whether voluntary or involuntary, the holders of each depositary share
will be entitled to the fraction of the liquidation preference accorded each
share of the applicable series of preferred stock, as set forth in the
prospectus supplement.
Redemption
If the series of preferred stock represented by the applicable series of
depositary shares is redeemable, such depositary shares will be redeemed from
the proceeds received by the depositary resulting from the redemption, in
whole or in part, of preferred stock held by the depositary. Whenever A&P
redeems any preferred stock held by the depositary, the depositary will redeem
as of the same redemption date the number of depositary shares representing
the preferred stock so redeemed. The depositary will mail the notice of
redemption promptly upon receipt of such notice from A&P and not less than 30
nor more than 60 days prior to the date fixed for redemption of the preferred
stock and the depositary shares to the record holders of the depositary
receipts.
Voting
Promptly upon receipt of notice of any meeting at which the holders of the
series of preferred stock represented by the applicable series of depositary
shares are entitled to vote, the depositary will mail the information
contained in such notice of meeting to the record holders of the depositary
receipts as of the record date for such meeting. Each such record holder of
depositary receipts will be entitled to instruct the depositary as to the
exercise of the voting rights pertaining to the number of shares of preferred
stock represented by such record holder's depositary shares. The depositary
will endeavor, insofar as practicable, to vote such preferred stock
represented by such depositary shares in accordance with such instructions,
and A&P will agree to take all action which may be deemed necessary by the
depositary in order to enable the depositary to do so. The depositary will
abstain from voting any of the preferred stock to the extent that it does not
receive specific instructions from the holders of depositary receipts.
Withdrawal of Preferred Stock
Upon surrender of depositary receipts at the principal office of the
depositary, upon payment of any unpaid amount due the depositary, and subject
to the terms of the deposit agreement, the owner of the depositary shares
evidenced thereby is entitled to delivery of the number of whole shares of
preferred stock and all money and other property, if any, represented by such
depositary shares. Partial shares of preferred stock will not be issued. If
the depositary receipts delivered by the holder evidence a number of
depositary shares in excess of the number of depositary shares representing
the number of whole shares of preferred stock to be withdrawn, the depositary
will deliver to such holder at the same time a new depositary receipt
evidencing such excess number of depositary shares. Holders of preferred stock
thus withdrawn will not thereafter be entitled to deposit such shares under
the deposit agreement or to receive depositary receipts evidencing depositary
shares therefor.
Amendment and Termination of Deposit Agreement
The form of depositary receipt evidencing the depositary shares and any
provision of the deposit agreement may at any time and from time to time be
amended by agreement between A&P and the depositary. However, any amendment
which materially and adversely alters the rights of the holders, other than
any change in fees, will not be effective unless such amendment has been
approved by at least a majority of the depositary shares then outstanding. No
such amendment may impair the right, subject to the terms of the deposit
agreement, of any owner of any depositary shares to surrender the depositary
receipt evidencing such depositary shares with instructions to the depositary
to deliver to the holder the preferred
12
stock and all money and other property, if any, represented thereby, except in
order to comply with mandatory provisions of applicable law. The deposit
agreement may be terminated by A&P or the depositary only if all outstanding
depositary shares have been redeemed or there has been a final distribution in
respect of the preferred stock in connection with any dissolution of A&P and
such distribution has been made to all the holders of depositary shares.
Charges of Depositary
A&P will pay all transfer and other taxes and governmental charges arising
solely from the existence of the depositary arrangements. A&P will pay charges
of the depositary in connection with the initial deposit of the preferred
stock and initial issuance of the depositary shares, and redemption of the
preferred stock and all withdrawals of preferred stock by owners of depositary
shares. Holders of depositary receipts will pay transfer, income and other
taxes and governmental charges and other charges as are provided in the
deposit agreement to be for their accounts. The depositary may refuse to
transfer depositary shares, may withhold dividends and distributions and may
sell the depositary shares evidenced by such depositary receipt if such
charges are not paid.
Miscellaneous
The depositary will forward to the holders of depositary receipts all
reports and communications from A&P which are delivered to the depositary and
which A&P is required to furnish to the holders of the preferred stock. In
addition, the depositary will make available for inspection by holders of
depositary receipts at the principal office of the depositary, and at such
other places as it may from time to time deem advisable, any reports and
communications received from A&P which are received by the depositary as the
holder of preferred stock.
Neither the depositary nor A&P assumes any obligation or will be subject to
any liability under the deposit agreement to holders of depositary receipts
other than for its negligence or willful misconduct. Neither the depositary
nor A&P will be liable if it is prevented or delayed by law or any
circumstance beyond its control in performing its obligations under the
deposit agreement. The obligations of A&P and the depositary under the deposit
agreement will be limited to performance in good faith of their duties
thereunder, and they will not be obligated to prosecute or defend any legal
proceeding in respect of any depositary shares or preferred stock unless
satisfactory indemnity is furnished. A&P and the depositary may rely on
written advice of counsel or accountants, on information provided by holders
of the depositary receipts or other persons believed in good faith to be
competent to give such information and on documents believed to be genuine and
to have been signed or presented by the proper party or parties.
Resignation and Removal of Depositary
The depositary may resign at any time by delivering to A&P notice of its
election to do so, and A&P may at any time remove the depositary, any such
resignation or removal to take effect upon the appointment of a successor
depositary and its acceptance of such appointment. Such successor depositary
must be appointed within 60 days after delivery of the notice for resignation
or removal and must be a bank or trust company having its principal office in
the United States of America and having a combined capital and surplus of at
least $100,000,000.
Federal Income Tax Consequences
Owners of depositary shares will be treated for Federal income tax purposes
as if they were owners of the preferred stock represented by such depositary
shares. Accordingly, such owners will be entitled to take into account, for
Federal income tax purposes, income and deductions to which they would be
entitled if they were holders of such preferred stock. In addition,
(1) no gain or loss will be recognized for Federal income tax purposes
upon the withdrawal of preferred stock in exchange for depositary
shares,
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(2) the tax basis of each share of preferred stock to an exchanging owner
of depositary shares will, upon such exchange, be the same as the
aggregate tax basis of the depositary shares exchanged therefor, and
(3) the holding period for preferred stock in the hands of an exchanging
owner of depositary shares will include the period during which such
person owned such depositary shares.
DESCRIPTION OF DEBT SECURITIES
The senior debt securities may be issued from time to time in one or more
series under an indenture, dated as of January 1, 1991, between A&P and The
Chase Manhattan Bank (formerly Chemical Bank as successor by merger to
Manufacturers Hanover Trust Company), as trustee, which is filed as an exhibit
to the registration statement of which this prospectus is a part. The
subordinated debt securities may be issued from time to time in one or more
series under an indenture between A&P and a trustee to be identified in the
related prospectus supplement, a form of which is filed as an exhibit to the
registration statement of which this prospectus is a part. The following
summary of provisions of the indentures and the debt securities does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the provisions of the indentures, including defined terms. The
particular terms of the debt securities offered by any prospectus supplement
and the extent, if any, to which such general provisions may apply to the
offered debt securities will be described in the applicable prospectus
supplement.
General
Neither indenture limits the amount of debt securities which may be issued
thereunder and each indenture provides that debt securities may be issued
thereunder up to the aggregate principal amount which may be authorized from
time to time. The debt securities may be issued from time to time in one or
more series. The senior debt securities will be unsecured and will rank on a
parity with all other unsecured and unsubordinated indebtedness of A&P. Each
series of subordinated debt securities will be unsecured and subordinated to
all present and future senior indebtedness with respect to such series. The
senior indebtedness will be described in an accompanying prospectus
supplement.
You should read the prospectus supplement relating to the particular series
of debt securities for the following terms of the offered debt securities:
1. the designation, aggregate principal amount and authorized
denominations;
2. the issue price, expressed as a percentage of the aggregate
principal amount;
3. the maturity date;
4. the interest rate per annum, if any;
5. if the offered debt securities provide for interest payments, the
date from which such interest will accrue, the dates on which such
interest will be payable, the date on which payment of such interest
will commence and the regular record dates for such interest payment
dates;
6. any optional or mandatory sinking fund provisions;
7. the date, if any, after which and the price or prices at which the
offered debt securities may be optionally redeemed or must be
mandatorily redeemed, and any other terms and provisions of such
optional or mandatory redemptions;
8. if other than denominations of $1,000 and any integral multiple
thereof, the denominations in which offered debt securities of the
series will be issuable;
9. if other than the full principal amount, the portion of the
principal amount of offered debt securities of the series which will
be payable upon acceleration or provable in bankruptcy;
10. any events of default not set forth in the applicable indenture;
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11. the currency or currencies, including composite currencies, in which
principal, premium and interest will be payable, if other than the
currency of the United States of America;
12. if principal, premium or interest is payable, at the election of A&P
or any holder thereof, in a coin or currency other than that in
which the offered debt securities of the series are stated to be
payable, the period or periods within which, and the terms and
conditions upon which, such election may be made;
13. if denominated in a currency or currencies other than the currency
of the United States of America, the equivalent price in the
currency of the United States of America for purposes of determining
the voting rights of holders of such debt securities under the
applicable indenture;
14. if the amount of payments of principal, premium or interest may be
determined with reference to an index, formula or other method based
on a coin or currency other than that in which the offered debt
securities of the series are stated to be payable, the manner in
which such amounts will be determined; and
15. any additional restrictive covenants or other material terms
relating to the offered debt securities, which may not be
inconsistent with the applicable indenture.
Unless otherwise indicated in the prospectus supplement relating thereto,
principal, premium and interest will be payable and the debt securities will
be transferable at the corporate trust office of the applicable trustee.
Unless other arrangements are made, principal, premium and interest will be
paid by checks mailed to the holders at their registered addresses.
Unless otherwise indicated in the prospectus supplement relating thereto,
the debt securities will be issued only in fully registered form without
coupons, in denominations of $1,000 or any integral multiple thereof. No
service charge will be made for any transfer or exchange of the debt
securities, but A&P may require payment of a sum sufficient to cover any tax
or other governmental charge payable in connection therewith.
Some or all of the debt securities may be issued as discounted debt
securities, bearing no interest or interest at a rate which at the time of
issuance is below market rates, to be sold at a substantial discount below
their stated principal amount. Federal income tax consequences and other
special considerations applicable to any such discounted debt securities will
be described in the prospectus supplement relating thereto.
Restricted and Unrestricted Subsidiaries
The senior debt securities indenture classified A&P's subsidiaries
restricted subsidiaries and unrestricted subsidiaries. The subordinated debt
securities indenture does not classify A&P's subsidiaries or unrestricted
subsidiaries. Accordingly, the following provisions do not apply to
subordinated debt securities.
The various restrictive provisions of the senior debt securities indenture
apply to A&P and its restricted subsidiaries and do not apply to unrestricted
subsidiaries. The assets and indebtedness of unrestricted subsidiaries are not
consolidated with those of A&P and its restricted subsidiaries in making
financial calculations under the senior debt securities indenture. Investments
by A&P or by its restricted subsidiaries in unrestricted subsidiaries are
excluded from A&P's assets for purposes of the senior debt securities
indenture. Unrestricted subsidiaries are those subsidiaries which are
designated as unrestricted subsidiaries by the board of directors from time to
time pursuant to the senior debt securities indenture. Unrestricted
subsidiaries may also be designated as restricted subsidiaries by the board of
directors pursuant to the senior debt securities indenture. Restricted
subsidiaries are all subsidiaries other than unrestricted subsidiaries. At the
date of execution of the senior debt securities indenture and at the date of
this prospectus, all subsidiaries of A&P were restricted subsidiaries.
However, subject to compliance with the terms of the senior debt securities
indenture, A&P has the right to change the designation of one or more of such
subsidiaries to unrestricted subsidiaries. A wholly-owned restricted
subsidiary is a restricted subsidiary, of which at least 99% of the capital
stock, except directors' qualifying shares, is owned by A&P and its other
wholly-owned restricted subsidiaries.
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A restricted subsidiary may not be designated an unrestricted subsidiary
unless A&P and its restricted subsidiaries would thereafter be permitted to
incur at least $1.00 of secured debt under the senior debt securities
indenture.
An unrestricted subsidiary may not be designated a restricted subsidiary if
it has any secured debt or attributable debt unless immediately thereafter A&P
and its restricted subsidiaries would be permitted to incur such secured debt
under the terms of the senior debt securities indenture.
Restrictions Upon Secured Debt
The senior debt securities indenture restricts the incurrence of secured
debt by A&P. The subordinated debt securities indenture does not restrict the
incurrence of secured debt of any kind by A&P. Accordingly, the following
provisions do not apply to subordinated debt securities.
The restrictions which the senior debt securities indenture places upon
A&P's and its restricted subsidiaries' incurrence of secured debt apply only
to debt secured by principal properties of A&P and its restricted
subsidiaries. For purposes of the senior debt securities indenture, a
principal property of A&P and its restricted subsidiaries refers to all
improved real property and related improvements owned by A&P or a restricted
subsidiary having a book value equal to at least 1% of their consolidated net
tangible assets of A&P and its restricted subsidiaries. At the present time,
there are only a few principal properties of A&P and its restricted
subsidiaries.
A&P's and its restricted subsidiaries' consolidated net tangible assets are
(a) the total amount of assets, less applicable reserves and other
properly deductible items, which under generally accepted accounting
principles would be included on a consolidated balance sheet of A&P
and its restricted subsidiaries after deducting, without duplication,
the sum of
(1) all liabilities and liability items which under generally
accepted accounting principals would be included on such balance
sheet, except funded debt, liabilities in respect of capital
leases, other than the current portion thereof, capital stock and
surplus, surplus reserves and provisions for deferred income
taxes, and
(2) all good will, trade names, trademarks, patents, unamortized debt
discount and expense and other like intangibles, which in each
case under generally accepted accounting principles would be
included on such consolidated balance sheet,
less
(b) the amount which would be so included on such consolidated balance
sheet for investments
(1) in unrestricted subsidiaries, or
(2) in corporations while they were unrestricted subsidiaries but
which at the time of computation are not subsidiaries of A&P.
Consolidated net tangible assets is a financial calculation which excludes
unrestricted subsidiaries.
Neither A&P nor a restricted subsidiary is permitted to incur debt secured
by any of their principal properties without equally and ratably securing the
senior debt securities. This restriction does not apply to customary permitted
encumbrances described in the senior debt securities indenture, including
purchase money mortgages, encumbrances existing on property at the time it is
acquired by A&P or a restricted subsidiary or created within 18 months of the
date of its acquisition, conditional sales and similar agreements. The senior
debt securities indenture also permits other indebtedness secured by
encumbrances not otherwise specifically permitted which, together with
attributable debt respecting existing sale and leaseback transactions entered
into after the date of the senior debt securities indenture, would not at the
time exceed 10% of the consolidated net tangible assets of A&P and its
restricted subsidiaries. Sale and leaseback transactions entered into in
respect of property acquired by A&P or a restricted subsidiary during the 18
months prior to the date of such sale and leaseback transaction are excluded
from the calculation described in the preceding sentence.
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Restrictions Upon Sales with Leases Back
The senior debt securities indenture restricts sale and leaseback
transactions by A&P. The subordinated debt securities indenture does not
restrict sale and leaseback transactions of any kind by A&P. Accordingly, the
following provisions do not apply to subordinated debt securities.
Under the senior debt securities indenture A&P is not permitted, and may not
permit a restricted subsidiary, to sell any of their principal properties with
the intention that A&P or any restricted subsidiaries take back a lease of any
such principal property, except
1. sale and leaseback transactions among A&P and/or one or more wholly-
owned restricted subsidiaries,
2. where the lease is for a period, including renewals, of not more than 36
months after which it is intended that the use of such principal
property by the lessee will be discontinued,
3. where A&P would be able to incur additional secured debt not otherwise
specifically permitted by the senior debt securities indenture in an
amount equal to the attributable debt respecting such sale and leaseback
transaction,
4. where the sale and leaseback transaction is entered into in respect of
property acquired by A&P or a restricted subsidiary within 18 months of
such acquisition, or
5. where A&P within 180 days of entering into the sale and leaseback
transaction applies an amount equal to the lesser of
(a) the net proceeds of the sale of the property leased pursuant to
such transaction or
(b) the fair market value of the property so leased
to
1. the retirement of secured debt of A&P or any restricted
subsidiaries, or senior debt securities, or
2. the acquisition of one or more principal properties other than the
principal property involved in such sale.
A bona fide commitment to acquire a principal property entered into within 180
days of a sale and leaseback transaction shall be deemed to satisfy the
requirement to acquire a principal property.
Restrictions Upon Merger and Sale of Assets
The senior debt securities indenture provides that no merger of A&P with or
sale of A&P's property substantially as an entirety to any other corporation
shall be made if, as a result, properties or assets of A&P would become
subject to a mortgage or lien which would not be permitted by the senior debt
securities indenture, unless the senior debt securities shall be equally and
ratably secured with such obligations. Each indenture provides that any
successor entity must be a corporation organized in the United States, shall
expressly assume the due and punctual payment of the principal, premium and
interest on the debt securities and, immediately after giving effect to a
merger or consolidation, no event of default, and no event which, after notice
or lapse of time or both, would become an event of default, shall have
happened and be continuing.
Modification of the Indentures
Each indenture and the rights of the respective holders may be modified by
A&P only with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding debt securities of all series
under the respective Indenture affected by the modification, taken together as
one class, but no modification altering the terms of payment of principal or
interest, changing the place or medium of payment of principal or interest,
impairing the rights of holders to institute suit for payment or reducing the
percentage required for modification will be effective against any holder
without his consent.
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Events of Default
Each indenture defines an event of default with respect to the debt
securities of any series as being any one of the following events:
(a) default for 30 days in any payment of interest when due,
(b) default in any payment of principal when due,
(c) default in the deposit of any sinking fund payment when due,
(d) default for 60 days after appropriate notice in the performance
of any other covenant in the debt securities or the applicable
indenture, or
(e) events of bankruptcy, insolvency or reorganization.
In case an event of default shall occur and be continuing with respect to the
debt securities of any series, the applicable trustee or the holders of not
less than 25% in aggregate principal amount of the debt securities then
outstanding of that series may declare the principal of the debt securities of
such series and the accrued interest thereon to be due and payable. Any event
of default with respect to the debt securities of any series which has been
cured may be waived by the holders of a majority in aggregate principal amount
of the debt securities of that series then outstanding.
Each indenture requires A&P to file annually with the applicable trustee a
written statement signed by two officers of A&P as to the absence of material
defaults under the terms of such indenture. Each indenture provides that the
applicable trustee may withhold notice to the holders of any default if it
considers it in the interest of the holders to do so, except notice of a
default in payment of principal, premium or interest.
Subject to the provisions of each indenture relating to the duties of the
trustee in case an event of default shall occur and be continuing, each
indenture provides that the trustee shall be under no obligation to exercise
any of its rights or powers under such indenture at the request, order or
direction of holders unless such holders shall have offered to the trustee
reasonable indemnity. Subject to such provisions for indemnification and the
rights of the trustee, each indenture provides that the holders of a majority
in principal amount of the debt securities of any series then outstanding
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or exercising any trust or
power conferred on the trustee.
Defeasance and Discharge
The terms of each indenture provide A&P with the option to be discharged
from any and all obligations in respect of the debt securities issued
thereunder upon the deposit with the trustee, in trust, of money or U.S.
government obligations, or both, which through the payment of interest and
principal thereof in accordance with their terms will provide money in an
amount sufficient to pay any installment of principal, premium and interest on
and any mandatory sinking fund payments in respect of the debt securities on
the stated maturity of such payments in accordance with the terms of the debt
securities and the indenture governing such debt securities. Such option may
only be exercised if A&P has received from, or there has been published by,
the United States Internal Revenue Service a ruling to the effect that such a
discharge will not be deemed, or result in, a taxable event with respect to
holders. Such discharge would not apply to A&P's obligations to register the
transfer or exchange of debt securities, to replace stolen, lost or mutilated
debt securities, to maintain paying agencies and hold moneys for payment in
trust.
Defeasance of Certain Covenants
The terms of the senior debt securities provide A&P with the option to omit
to comply with the covenants described under the headings "Restricted and
Unrestricted Subsidiaries," "Restrictions upon Secured Debt" and "Restrictions
upon Sales with Leases Back" above. A&P, in order to exercise such option,
will be required to deposit with the trustee money or U.S. government
obligations, or both, which through the payment of interest and principal
thereof in accordance with their terms will provide money in an amount
sufficient to pay principal, premium, if any, and interest on any mandatory
sinking fund payments in
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respect of the senior debt securities on the stated maturity of such payments
in accordance with the terms of the senior debt securities indenture and such
senior debt securities. A&P will also be required to deliver to the trustee an
opinion of counsel to the effect that A&P has received from, or there has been
published by, the IRS a ruling to the effect that the deposit and related
covenant defeasance will not cause the holders of such series to recognize
income, gain or loss for federal income tax purposes.
The prospectus supplement may further describe the provisions, if any, of
any particular series of offered debt securities permitting a discharge or
such an omission to comply with any covenants.
Senior Trustee's Relationship with A&P
The senior debt securities indenture trustee acts as a depositary of funds
of, extends lines of credit to, and performs other services for A&P in the
normal course of its business.
Global Securities
The debt securities of a series may be issued in whole or in part in the
form of one or more global securities that will be deposited with, or on
behalf of, a depository identified in the applicable prospectus supplement and
registered in the name of the depository or a nominee for the depository. In
such a case, one or more global securities will be issued in a denomination or
aggregate denominations equal to the portion of the aggregate principal amount
of outstanding debt securities of the series to be represented by such global
security or securities. Unless and until it is exchanged in whole or in part
for debt securities in definitive certificated form, a global security may not
be transferred except as a whole by the depository for such global security to
a nominee of such depository or by a nominee of such depository to such
depository or another nominee of such depository or by such depository or any
such nominee to a successor depository for such series or a nominee of such
successor depository and except in the circumstances described in the
applicable prospectus supplement.
A&P expects that the following provisions will apply to depository
arrangements with respect to any portion of a series of debt securities to be
represented by a global security. Any additional specific terms of the
depository arrangement will be described in the applicable prospectus
supplement.
Upon the issuance of any global security, and the deposit of such global
security with or on behalf of the depository for such global security, the
depository will credit, on its book-entry registration and transfer system,
the respective principal amounts of the debt securities represented by such
global security to the accounts of institutions that have accounts with the
depository or its nominee. The accounts to be credited will be designated by
the underwriters or agents engaging in the distribution of such debt
securities or by A&P, if such debt securities are offered and sold directly by
A&P. Ownership of beneficial interests in a global security will be limited to
participating institutions or persons that may hold interest through such
participating institutions. Ownership of beneficial interests by participating
institutions in such global security will be shown on, and the transfer of
such beneficial interests will be effected only through, records maintained by
the depository for such global security or by its nominee. Ownership of
beneficial interests in such global security by persons that hold through
participating institutions will be shown on, and the transfer of such
beneficial interests within such participating institutions will be effected
only through, records maintained by such participating institutions. The laws
of some jurisdictions may require that purchasers of securities take physical
delivery of such securities in certificated form. The foregoing limitations
and such laws may impair the ability to transfer beneficial interests in such
global securities.
So long as the depository for a global security, or its nominee, is the
registered owner of such global security, such depository or such nominee, as
the case may be, will be considered the sole owner or holder of the debt
securities represented by such global security for all purposes under the
applicable indenture. Unless otherwise specified in the applicable prospectus
supplement and except as specified below, owners of beneficial interests in
such global security will not be entitled to have debt securities of the
series represented by such global security registered in their names, will not
receive or be entitled to receive physical delivery of debt securities of such
series in certificated form and will not be considered the holders thereof for
any purposes under the indenture. Accordingly, each person owning a beneficial
interest in such global security must rely on the procedures of the depository
and, if such person is not a participating institution, on the
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procedures of the participating institution through which such person owns its
interest, to exercise any rights of a holder under the indenture.
The depository may grant proxies and otherwise authorize participating
institutions to give or take any request, demand, authorization, direction,
notice, consent, waiver or other action which a holder is entitled to give or
take under the applicable indenture. A&P understands that, under existing
industry practices, if A&P requests any action of holders or any owner of a
beneficial interest in such global security desires to give any notice or take
any action a holder is entitled to give or take under the applicable
indenture, the depository would authorize the participating institutions to
give such notice or take such action, and participating institutions would
authorize beneficial owners owning through such participating institutions to
give such notice or take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
Unless otherwise specified in the applicable prospectus supplement, payments
with respect to principal, premium and interest on debt securities represented
by a global security registered in the name of a depository or its nominee
will be made by A&P to such depository or its nominee, as the case may be, as
the registered owner of such global security.
A&P expects that the depository for any debt securities represented by a
global security, upon receipt of any payment of principal, premium or
interest, will credit participating institutions' accounts with payments in
amounts proportionate to their respective beneficial interests in the
principal amount of such global security as shown on the records of such
depository. A&P also expects that payments by participating institutions to
owners of beneficial interests in such global security held through such
participating institutions will be governed by standing instructions and
customary practices, as is now the case with the securities held for the
accounts of customers registered in street names, and will be the
responsibility of such participating institutions. None of A&P, the trustees
or any agent of A&P or the trustees shall have any responsibility or liability
for any aspect of the records relating to or payments made on account of
beneficial interests in a global security, or for maintaining, supervising or
reviewing any records relating to such beneficial interests.
Unless otherwise specified in the applicable prospectus supplement, a global
security of any series will be exchangeable for certificated debt securities
of the same series only if
(1) the depository for such global securities notifies A&P that it is
unwilling or unable to continue as depository or such depository
ceases to be a clearing agency registered under the Exchange Act and,
in either case, a successor depository is not appointed by A&P within
90 days after A&P receives such notice or becomes aware of such
ineligibility,
(2) A&P in its sole discretion determines that such global securities
shall be exchangeable for certificated debt securities, or
(3) there shall have occurred and be continuing an event of default under
the applicable indenture with respect to the debt securities of such
series.
Upon any such exchange, owners of beneficial interests in such global security
or securities will be entitled to physical delivery of individual debt
securities in certificated form of like tenor and terms equal in principal
amount to such beneficial interests, and to have such debt securities in
certificated form registered in the names of the beneficial owners, which
names are expected to be provided by such depository's relevant participating
institutions to the applicable trustee.
The following is based on information furnished to A&P:
In the event that the Depository Trust Company acts as depository for the
global securities of any series, such global securities will be issued as
fully registered securities registered in the name of Cede & Co., DTC's
partnership nominee.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that
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its participating institutions deposit with DTC. DTC also facilitates the
settlement among participating institutions of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participating institutions' accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct participating institutions include securities brokers and dealers,
banks, trust companies, clearing corporations and other organizations. DTC is
owned by a number of its direct participating institutions and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to others, such as securities brokers and dealers and banks and
trust companies that clear through or maintain a custodial relationship with a
direct participating institution, either directly or indirectly. The rules
applicable to DTC and its participating institutions are on file with the
Commission.
To facilitate subsequent transfers, the debt securities are registered in
the name of DTC's nominee, Cede & Co. The deposit of the debt securities with
DTC and their registration in the name of Cede & Co. will effect no change in
beneficial ownership. DTC has no knowledge of the actual beneficial owners of
the debt securities, DTC's records reflect only the identity of the direct
participating institutions to whose accounts debt securities are credited,
which may or may not be the beneficial owners. The participating institutions
remain responsible for keeping account of their holdings on behalf of their
customers.
Delivery of notices and other communications by DTC to direct participating
institutions, by direct participating institutions to indirect participating
institutions, and by direct participating institutions and indirect
participating institutions to beneficial owners of debt securities are
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Neither DTC nor Cede & Co. consents or votes with respect to the debt
securities. Under its usual procedures, DTC mails a proxy to the issuer as
soon as possible after the record date. The proxy assigns Cede & Co.'s
consenting or voting rights to those direct participating institution to whose
accounts the debt securities are credited on the record date.
If applicable, redemption notices shall be sent to Cede & Co. If less than
all of the debt securities of a series represented by global securities are
being redeemed, DTC's practice is to determine by lot the amount of the
interest of each direct participating institutions in such issue to be
redeemed.
To the extent that any debt securities provide for repayment or repurchase
at the option of the holders thereof, a beneficial owner shall give notice of
any option to elect to have its interest in the global security repaid by A&P,
through its participating institution, to the applicable trustee, and shall
effect delivery of such interest in a global security by causing the direct
participating institution to transfer the direct participating institution's
interest in the global security or securities representing such interest, on
DTC's records, to the applicable trustee. The requirement for physical
delivery of debt securities in connection with a demand for repayment or
repurchase will be deemed satisfied when the ownership rights in the global
security or securities representing such debt securities are transferred by
direct participating institutions on DTC's records.
DTC may discontinue providing its services as securities depository with
respect to the debt securities at any time. Under such circumstances, in the
event that a successor securities depository is not appointed, debt security
certificates are required to be printed and delivered as described above.
A&P may decide to discontinue use of the system of book-entry transfers
through the securities depository. In that event, debt security certificates
will be printed and delivered as described above.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that A&P believes to be reliable, but A&P takes
no responsibility for the accuracy thereof.
DESCRIPTION OF SECURITIES WARRANTS
A&P may issue securities warrants for the purchase of debt securities or
common stock. Securities warrants may be issued independently or together with
debt securities or common stock offered by any prospectus supplement and may
be attached to or separate from such debt securities or common stock. Each
series of securities warrants will be issued under a separate warrant
agreement to be entered into between
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A&P and a bank or trust company, as warrant agent, all as set forth in the
prospectus supplement relating to the particular issue of offered securities
warrants. The warrant agent will act solely as an agent of A&P in connection
with the securities warrant certificates relating to the securities warrants
and will not assume any obligation or relationship of agency or trust for or
with any holders of securities warrant certificates or beneficial owners of
securities warrants. The following summaries of provisions of the warrant
agreements and securities warrants do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the warrant agreement and the securities warrant certificates
relating to each series of securities warrants which will be filed with the
Commission and incorporated by reference as an exhibit to the registration
statement of which this prospectus is a part at or prior to the time of the
issuance of such series of securities warrants.
General
If securities warrants are offered, the applicable prospectus supplement
will describe the terms of such securities warrants, including, in the case of
securities warrants for the purchase of debt securities, the following where
applicable:
1. the offering price;
2. the denominations and terms of the series of debt securities
purchasable upon exercise of such securities warrants and whether
such debt securities are senior debt securities or subordinated
debt securities;
3. the designation and terms of any series of debt securities with
which such securities warrants are being offered and the number
of such securities warrants being offered with each such debt
security;
4. the date, if any, on and after which such securities warrants and
any related series of debt securities will be transferable
separately;
5. the principal amount of the series of debt securities purchasable
upon exercise of each such securities warrant and the price at
which such principal amount of debt securities of such series may
be purchased upon such exercise;
6. the date on which the right to exercise such securities warrants
shall commence and the date on which such right shall expire;
7. whether the securities warrants will be issued in registered or
bearer form;
8. any special United States Federal income tax consequences;
9. the terms, if any, on which A&P may accelerate the date by which
the securities warrants must be exercised; and
10. any other terms of such securities warrants.
In the case of securities warrants for the purchase of common stock, the
applicable prospectus supplement will describe the terms of such securities
warrants, including the following where applicable:
1. the offering price;
2. the aggregate number of shares purchasable upon exercise and the
exercise price;
3. the designation and terms of the series of debt securities with
which such securities warrants are being offered, if any, and the
number of such securities warrants being offered with each such
debt security;
4. the date, if any, on and after which such securities warrants and
any related series of debt securities or common stock will be
transferable separately;
5. the date on which the right to exercise such securities warrants
shall commence and the expiration date;
22
6. any special United States Federal income tax consequences;
7. the terms, if any, on which A&P may accelerate the date by which
the securities warrants must be exercised; and
8. any other terms of such securities warrants.
Securities warrant certificates may be exchanged for new securities warrant
certificates of different denominations, may be presented for registration of
transfer, and may be exercised at the corporate trust office of the applicable
warrant agent or any other office indicated in the applicable prospectus
supplement. Prior to the exercise of any securities warrant to purchase debt
securities, holders of such securities warrants will not have any of the
rights of holders of the debt securities purchasable upon such exercise,
including the right to receive payments of principal, premium or interest on
such debt securities or to enforce covenants in the applicable indenture.
Prior to the exercise of any securities warrants to purchase common stock,
holders of such securities warrants will not have any rights of holders of
such common stock, including the right to receive payments of dividends on
such common stock, or to exercise any applicable right to vote.
Exercise of Securities Warrants
Each securities warrant will entitle the holder thereof to purchase such
principal amount of debt securities or number of shares of common stock, as
the case may be, at such exercise price as shall in each case be set forth in,
or calculable from, the prospectus supplement relating to the offered
securities warrants. After the close of business on the expiration date,
unexercised securities warrants will become void.
Securities warrants may be exercised by delivering to the applicable warrant
agent payment as provided in the applicable prospectus supplement of the
amount required to purchase the debt securities or common stock, as the case
may be, purchasable upon such exercise together with information set forth on
the reverse side of the securities warrant certificate. Securities warrants
will be deemed to have been exercised upon receipt of payment of the exercise
price in cash or by certified or official bank check, subject to the receipt
within five business days of the securities warrant certificate evidencing
such securities warrants. Upon receipt of such payment and the securities
warrant certificate properly completed and duly executed at the corporate
trust office of the applicable warrant agent or any other office indicated in
the applicable prospectus supplement, A&P will, as soon as practicable, issue
and deliver the debt securities or common stock, as the case may be,
purchasable upon such exercise. If fewer than all of the securities warrants
represented by such securities warrant certificate are exercised, a new
securities warrant certificate will be issued for the remaining amount of
securities warrants.
Amendments and Supplements to Warrant Agreements
The warrant agreements may be amended or supplemented without the consent of
the holders of the securities warrants issued thereunder to effect changes
that are not inconsistent with the provisions of the securities warrants and
that do not adversely affect the interests of the holders of the applicable
securities warrants.
Warrant Adjustments
The applicable prospectus supplement will specify the manner, if any, in
which the exercise price of, and the number or amount of securities covered
by, a common stock warrant are subject to adjustment.
DESCRIPTION OF PREFERRED TRUST SECURITIES
Each trust may issue only one series of preferred trust securities having
terms described in the prospectus supplement relating thereto. The trust
agreement of each trust will authorize the administrative trustees, on behalf
of the trust, to issue the preferred trust securities and common trust
securities of such trust each representing undivided beneficial interests in
the assets of such trust. You should read the prospectus supplement relating
to the particular preferred trust securities of a trust for specific terms,
including
1. the distinctive designation of such preferred trust securities;
23
2. the number of preferred trust securities;
3. the annual distribution rate or method of its calculation, the date or
dates on which such distributions shall be payable and the record date
with respect to any such distributions;
4. whether distributions on such preferred trust securities shall be
cumulative and, in the case of preferred trust securities having
cumulative distribution rights, the date from which distributions on
such preferred trust securities shall be cumulative;
5. the amount or amounts that shall be paid out of the assets of such trust
to the holders of the preferred trust securities of such trust upon
voluntary or involuntary dissolution of such trust;
6. the obligation, if any, of such trust to purchase or redeem such
preferred trust securities and the price or prices at which, the period
or periods within which, and the terms and conditions upon which such
preferred trust securities shall be purchased or redeemed, in whole or
in part, pursuant to such obligation;
7. the voting rights of such preferred trust securities including the
approval, if any, required to amend such trust;
8. the trust's rights to defer distributions on the preferred trust
securities in conjunction with A&P's extending the interest payment
period on the related junior subordinated debt securities; and
9. any other relative rights, preferences, privileges, limitations or
restrictions of such preferred trust securities not inconsistent with
the trust agreement of such trust or applicable law.
All preferred trust securities offered hereby will be guaranteed by A&P to the
extent set forth under "Description of the Preferred Trust Securities
Guarantees." Any material United States federal income tax considerations
applicable to an offering of preferred trust securities will be described in
the prospectus supplement relating thereto.
DESCRIPTION OF PREFERRED TRUST SECURITIES GUARANTIES
Set forth below is a summary of information concerning the guaranties that
will be executed and delivered by A&P for the benefit of the holders of
preferred trust securities of the respective trusts. Each guaranty will be
qualified as an indenture under the 1939 Act. Bankers Trust Company will act
as guaranty trustee for each guaranty for purposes of the 1939 Act. Each
guaranty will be held by the guaranty trustee for the benefit of holders of
the preferred trust securities to which it relates.
Pursuant to each guaranty, A&P will irrevocably and unconditionally agree,
to the extent set forth therein, to pay in full, to the holders of the related
preferred trust securities
1. any accrued and unpaid distributions required to be paid on the
preferred trust securities of each trust but if and only if and to the
extent that such trust has funds legally and immediately available
therefor,
2. the redemption price, including all accrued and unpaid distributions to
the date of redemption, with respect to any preferred trust securities
called for redemption by such trust, but if and only to the extent such
trust has funds legally and immediately available therefor, and
3. upon a dissolution, of such trust, other than in connection with the
distribution of junior subordinated debt securities to the holders of
trust securities of such trust or the redemption of all of the preferred
trust securities of such trust, the lesser of
(a) the aggregate of the liquidation amount and all accrued and unpaid
distributions on the preferred trust securities of such trust to
the date of payment, to the extent such trust has funds legally and
immediately available therefor, and
(b) the amount of assets of such trust remaining legally available for
distribution to holders of preferred trust securities of such trust
upon liquidation of such trust.
24
A&P's obligation to make a guaranty payment may be satisfied by direct payment
of the required amounts by A&P to the holders of the related preferred trust
securities or by causing the related trust to pay such amounts to such
holders.
Each guaranty will be a guarantee of payments with respect to the related
preferred trust securities from the time of issuance of such preferred trust
securities, but will not apply to the payment of distributions and other
payments on such preferred trust securities when the related trust does not
have sufficient funds legally and immediately available to make such
distributions or other payments. If A&P does not make interest payments on the
junior subordinated debt securities held by the property trustee under a
trust, such trust will not make distributions on its preferred trust
securities.
Subordination
A&P's obligations under each guaranty will constitute an unsecured
obligation of A&P and will rank
1. subordinate and junior in right of payment to all other liabilities of
A&P, including the junior subordinated debt securities, except those
obligations or liabilities made pari passu or subordinate by their
terms,
2. pari passu with the most senior preferred or preference stock now or
hereafter issued by A&P and with any guarantee now or hereafter entered
into by A&P in respect of any preferred or preference securities of any
affiliate of A&P, and
3. senior to all common stock of A&P.
The terms of the preferred trust securities will provide that each holder of
preferred trust securities by acceptance thereof agrees to the subordination
provisions and other terms of the guaranty related thereto.
Each guaranty will constitute a guarantee of payment and not of collection.
This means that the guaranteed party may institute a legal proceeding directly
against the guarantor to enforce its rights under the guarantee without first
instituting a legal proceeding against any other person or entity.
Amendments and Assignment
Except with respect to any changes that do not materially and adversely
affect the rights of holders of the related preferred trust securities, each
guaranty may be amended only with the prior approval of the holders of a
majority in liquidation amount of such outstanding preferred trust securities.
The manner of obtaining any such approval of holders of the preferred trust
securities will be as set forth in an accompanying prospectus supplement. All
guaranties and agreements contained in each guaranty shall bind the
successors, assigns, receivers, trustees and representatives of A&P and shall
inure to the benefit of the holders of the related preferred trust securities
then outstanding.
Termination
Each guaranty will terminate and be of no further force and effect as to the
related preferred trust securities upon full payment of the redemption price
of all such preferred trust securities, upon distribution of the related
junior subordinated debt securities to the holders of such preferred trust
securities, or upon full payment of the amounts payable upon liquidation of
the related trust. Each guaranty will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of the related
preferred trust securities must restore payment of any sums paid with respect
to such preferred trust securities or under such guaranty.
Events of Default
An event of default under each guaranty will occur upon the failure by A&P
to perform any of its payment obligations thereunder. The holders of a
majority in liquidation amount of the preferred trust securities to which any
guaranty relates have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the guaranty trustee in
respect of such guaranty or to direct the exercise of any trust or power
conferred upon the guaranty trustee under such guaranty. Any holder of the
25
related preferred trust securities may institute a legal proceeding directly
against A&P to enforce such holder's rights under such guaranty without first
instituting a legal proceeding against the guaranty trustee or any other
person or entity. The holders of a majority in liquidation amount of preferred
trust securities of any series may, by vote, on behalf of the holders of all
the preferred trust securities of such series, waive any past event of default
and its consequences.
Information Concerning the Guarantee Trustee
The guaranty trustee, prior to the occurrence of any event of default with
respect to any guaranty and after the curing or waiving of all events of
default with respect to such guaranty, undertakes to perform only such duties
as are specifically set forth in such guaranty and, in case an event of
default has occurred, shall exercise the same degree of care as a prudent
individual would exercise in the conduct of his or her own affairs. Subject to
such provisions, the guaranty trustee is under no obligation to exercise any
of the powers vested in it by any guaranty at the request of any holder of the
related preferred trust securities, unless offered reasonable indemnity
against the costs, expenses and liabilities which might be incurred thereby.
Bankers Trust Company, the guaranty trustee, also serves as property trustee
and as indenture trustee.
Agreements as to Expenses and Liabilities
Pursuant to an agreement as to expenses and liabilities to be entered into
by A&P under each trust agreement, A&P will irrevocably and unconditionally
guarantee to each person or entity to whom each trust becomes indebted or
liable the full payment of any indebtedness, expenses or liabilities of such
trust, other than obligations of such trust to pay to the holders of the
related preferred trust securities or other similar interests in such trust
the amounts due such holders pursuant to the terms of such preferred trust
securities or such other similar interests, as the case may be.
DESCRIPTION OF JUNIOR SUBORDINATED DEBT SECURITIES
General
Each series of junior subordinated debt securities will be issued under the
subordinated debt securities indenture. You should read the description of
debt securities for a description of terms applicable to the junior
subordinated debt securities. You should read the prospectus supplement
relating to the particular preferred trust securities for additional terms
relating to the junior subordinated debt securities.
Subordination
The junior subordinated debt securities are subordinated and junior in right
of payment to all senior indebtedness of A&P. With respect to the junior
subordinated debt securities, senior indebtedness refers to
1. any payment due in respect of indebtedness of A&P, whether outstanding
at the date of execution of the subordinated debt securities indenture
or thereafter incurred, created or assumed,
(a) in respect of money borrowed, including any financial derivative,
hedging or futures contract or similar instrument, and
(b) evidenced by securities, debentures, bonds, notes or other similar
instruments issued by A&P that, by their terms, are senior or
senior subordinated debt securities including, without limitation,
all obligations under its indentures with various trustees;
2. all capital lease obligations;
3. all obligations issued or assumed as the deferred purchase price of
property, all conditional sale obligations and all obligations of A&P
under any title retention agreement, but excluding trade accounts
payable arising in the ordinary course of business and long-term
purchase obligations;
4. all obligations for the reimbursement of any letter of credit, banker's
acceptance, security purchase facility or similar credit transaction;
26
5. all obligations of the type referred to in clauses 1 through 4 above of
other persons the payment of which A&P is responsible or liable as
obligor, guarantor or otherwise; and
6. all obligations of the type referred to in clauses 1 through 5 above of
other persons secured by any lien on any property or asset of A&P,
whether or not such obligation is assumed by A&P,
except for
1. any such indebtedness that is by its terms subordinated to or pari passu
with the junior subordinated debt securities and
2. any unsecured indebtedness between or among A&P and/or its affiliates.
No payment of principal, premium or interest on the junior subordinated debt
securities may be made if
(a) any senior indebtedness is not paid when due and any applicable
grace period with respect to such default has ended with such
default not being cured or waived or otherwise ceasing to exist, or
(b) the maturity of any senior indebtedness has been accelerated
because of a default.
Upon any payment or distribution of assets of A&P to creditors upon any
liquidation, dissolution, winding-up, reorganization, assignment for the
benefit of creditors, marshalling of assets or liabilities, or any bankruptcy,
insolvency or similar proceedings of A&P, the holders of senior indebtedness
shall be entitled to receive payment in full of all amounts due or to become
due on or in respect of all senior indebtedness before the holders of the
junior subordinated debt securities are entitled to receive or retain any
payment or distribution. Subject to the prior payment of all senior
indebtedness, the rights of the holders of the junior subordinated debt
securities will be subrogated to the rights of the holders of senior
indebtedness to receive payments and distributions applicable to such senior
indebtedness until all amounts owing on the junior subordinated debt
securities are paid in full.
As of February 27, 1999, senior indebtedness of A&P aggregated approximately
$860,692,000.
Additional Covenants
A&P will covenant in the supplemental subordinated debt securities indenture
relating to each series of junior subordinated debt securities, for the
benefit of the holders of each series of junior subordinated debt securities,
that
1. if A&P shall have given notice of its election to extend an interest
payment period for such series of junior subordinated debt
securities and such extension shall be continuing,
2. if A&P shall be in default with respect to its payment or other
obligations under the related preferred trust securities, or
3. if an event of default with respect to such series of junior
subordinated debt securities shall have occurred and be continuing,
then
(a) A&P shall not declare or pay any dividend or make any distributions
with respect to, or redeem, purchase, acquire or make a liquidation
payment with respect to, any of its capital stock, and
(b) A&P shall not make any payment of principal, premium or interest on
or repay, repurchase or redeem any debt securities issued by A&P
which rank pari passu with or junior to the junior subordinated debt
securities.
None of the foregoing, however, shall restrict
1. any of the actions described clause (a) above resulting from any
reclassification of A&P's capital stock or the exchange or conversion
of one class or series of A&P's capital stock for another class or
series of A&P's capital stock, or
27
2. the purchase of fractional interests in shares of A&P's capital stock
pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged.
The supplemental subordinated debt securities indenture will further provide
that, for so long as the preferred trust securities of any trust remain
outstanding, A&P covenants
1. to directly or indirectly maintain 100% ownership of the common
securities of such trust; provided that any permitted successor of A&P
under the subordinated debt securities indenture may succeed to A&P's
ownership of such common securities, and
2. to use its reasonable efforts to cause such trust
(a) to remain a statutory business trust, except in connection with
the distribution of junior subordinated debt securities to the
holders of trust securities in liquidation of such trust, the
redemption of all of the trust securities of such trust, or
mergers, consolidations or amalgamations permitted by the related
trust agreement, and
(b) to otherwise continue to be classified as a grantor trust for
United States federal income tax purposes.
Additional Event of Default
The supplemental subordinated debt securities indenture for each series of
junior subordinated debt securities will also provide that the failure of A&P
to pay to a preferred trust securities issuing trust that is a holder of
junior subordinated debt securities, concurrent with each payment of interest
and subject to the 30 day grace period applicable to interest payments, such
additional amounts as may be required so that the net amounts received and
retained by such trust, after paying taxes, duties, assessments or
governmental charges of whatever nature imposed by the United States or any
other taxing authority, other than withholding taxes, will not be less than
the amounts such trust would have received had no such taxes, duties,
assessments, or other governmental charges been imposed.
RELATIONSHIP AMONG THE PREFERRED TRUST SECURITIES,
THE JUNIOR SUBORDINATED DEBT SECURITIES AND
THE PREFERRED TRUST SECURITIES GUARANTIES
As long as payments of interest and other payments are made when due on each
series of junior subordinated debt securities, such payments will be
sufficient to cover distributions and payments due on the related trust
securities because
1. the aggregate principal amount of each series of junior subordinated
debt securities will be equal to the sum of the aggregate stated
liquidation amount of the related trust securities;
2. the interest rate and interest and other payment dates on each series
of junior subordinated debt securities will match the distribution
rate and distribution and other payment dates for the related
preferred trust securities;
3. A&P shall pay for all costs and expenses of each trust; and
4. each trust agreement provides that the trustees thereunder shall not
cause or permit the trust to, among other things, engage in any
activity that is not consistent with the purposes of the trust.
Payments of distributions and other payments due on the preferred trust
securities, to the extent funds therefor are legally and immediately
available, will be guaranteed by A&P as and to the extent set forth under
"Description of the Preferred Trust Securities Guaranties." If A&P does not
make interest payments on any series of junior subordinated debt securities,
it is not expected that the related trust will have sufficient funds to pay
distributions on its preferred trust securities. Each guaranty is a guaranty
from the time of its issuance, but does not apply to any payment of
distributions unless and until the related trust has sufficient funds legally
and immediately available for the payment of such distributions.
28
If A&P fails to make interest or other payments on any series of junior
subordinated debt securities when due, after taking into account any extension
period as described in the applicable prospectus supplement, the trust
agreement provides a mechanism whereby the holders of the related preferred
trust securities may appoint a substitute property trustee. Such holders may
also direct the property trustee to enforce its rights under the junior
subordinated debt securities of such series, including proceeding directly
against A&P to enforce such junior subordinated debt securities. If the
property trustee fails to enforce its rights under any series of junior
subordinated debt securities, to the fullest extent permitted by applicable
law, any holder of related preferred trust securities may institute a legal
proceeding directly against A&P to enforce the property trustee's rights under
such series of junior subordinated debt securities without first instituting
any legal proceeding against the property trustee or any other person or
entity. Notwithstanding the foregoing, a holder of preferred trust securities
may institute a legal proceeding directly against A&P, without first
instituting a legal proceeding against the property trustee or any other
person or entity, for enforcement of payment to such holder of principal of or
interest on junior subordinated debt securities of the related series having a
principal amount equal to the aggregate stated liquidation amount of the
preferred trust securities of such holder on or after the due dates specified
in the junior subordinated debt securities of such series.
If A&P fails to make payments under any guaranty, such guaranty provides a
mechanism whereby the holders of the preferred trust securities to which such
guaranty relates may direct the guaranty trustee to enforce its rights
thereunder. In addition, any holder of preferred trust securities may
institute a legal proceeding directly against A&P to enforce the guaranty
trustee's rights under the related guaranty without first instituting a legal
proceeding against the guaranty trustee or any other person or entity.
Upon any voluntary or involuntary dissolution of any trust, unless junior
subordinated debt securities of the related series are distributed in
connection therewith, the holders of preferred trust securities of such trust
will be entitled to receive, out of assets legally available for distribution
to holders, a liquidation distribution in cash as described in the applicable
prospectus supplement. Upon any voluntary or involuntary liquidation or
bankruptcy of A&P, the property trustee, as holder of the related series of
junior subordinated debt securities, would be a subordinated creditor of A&P,
subordinated in right of payment to all senior indebtedness with respect to
the related series of junior subordinated debt securities, but entitled to
receive payment in full of principal and interest, before any stockholders of
A&P receive payments or distributions. Because A&P is guarantor under each
guaranty and has agreed to pay for all costs, expenses and liabilities of each
trust other than the trust's obligations to holders of the preferred trust
securities, the positions of a holder of preferred trust securities and a
holder of junior subordinated debt securities of the related series relative
to other creditors and to stockholders of A&P in the event of liquidation or
bankruptcy of A&P would be substantially the same.
MARYLAND ANTI-TAKEOVER PROVISIONS
As of May 1, 1999, A&P was 54.92% owned by Tengelmann
Warenhandelsgesellschaft, a general retailer headquartered in Germany.
Tengelmann established its majority ownership position in A&P prior to the
enactment of the following legislation.
Maryland Fair Price Provisions. The Maryland fair price statute may
discourage persons or entities from attempting to gain control of a
corporation. This law imposes statutory requirements with respect to business
combinations, such as mergers and other similar transactions and specified
transfers of assets and securities, when such transactions are between a
company and an interested stockholder or an affiliate of an interested
stockholder. An interested stockholder is a person who owns beneficially,
directly or indirectly, 10% or more of the outstanding voting stock of the
corporation or an affiliate or associate of such person who was a 10% holder
at any time in the last two years.
Under the Maryland fair price statute, business combinations, including a
second-stage merger transaction, with an interested stockholder may not be
consummated for a period of five years following the most recent date on which
the interested stockholder becomes an interested stockholder. After this five-
year period, unless minimum value standards are met or an exemption is
available, transactions of these types may not be consummated between a
Maryland corporation and an interested stockholder unless recommended by
29
the board of directors of the corporation, and approved by the affirmative
vote of at least 80% of the votes entitled to be cast by the holders of
outstanding shares of voting stock and 66 2/3% of the votes entitled to be
cast by the holders of the voting stock held by stockholders other than the
interested stockholder. A business combination with an interested stockholder
which is approved by the board of directors of a Maryland corporation at any
time before an interested stockholder first becomes an interested stockholder
is not subject to the special voting requirements. A&P has no special
provisions in its Articles or by laws related to the Maryland fair price
statute.
Maryland Control Share Acquisition Provision. Maryland law imposes
limitations on voting rights in a control share acquisition. The Maryland
statute defines control shares as shares representing between
1. 20% to 33 1/3%,
2. 33 1/3% to 50%, and
3. 50% or higher
of the outstanding shares. The Maryland statute requires a two-thirds
stockholder vote, excluding shares owned by the acquiring person and members
of management, to accord voting rights to stock acquired in a control share
acquisition. Each acquisition of stock resulting in aggregate holdings within
a new control share level listed above would be a distinct control share
acquisition.
The statute requires Maryland corporations to hold a special meeting at the
request of an actual or proposed control share acquiror generally within 50
days after a request is made with the submission of an acquiring person
statement, but only if the acquiring person gives a written undertaking to pay
the corporation's expenses of the special meeting. In addition, the statute
gives the Maryland corporation redemption rights if there is a stockholder
vote on the issue and the grant of voting rights is not approved, or if an
acquiring person statement is not delivered to the target within 10 days
following a control share acquisition. Moreover, the statute provides that if,
before a control share acquisition occurs, voting rights are accorded to
control shares which results in the acquiring person having majority voting
power, then minority stockholders have appraisal rights. A&P has no special
provisions in its Articles or by laws related to the Maryland control share
acquisition statute.
Reference is made to the full text of the foregoing statutes for their
entire terms, and the partial summary contained herein is not intended to be
complete.
PLAN OF DISTRIBUTION
A&P may sell the Securities
1. through underwriters or dealers;
2. through agents;
3. directly to purchasers; or
4. through a combination of any such methods of sale.
Any such underwriter, dealer or agent may be deemed to be an underwriter
within the meaning of the Securities Act. The prospectus supplement relating
to any offering of securities will set forth their offering terms, including
the name or names of any underwriters, the purchase price of the securities
and the proceeds to A&P from such sale, any underwriting discounts,
commissions and other items constituting underwriters' compensation, any
initial public offering price, and any underwriting discounts, commissions and
other items allowed or reallowed or paid to dealers, and any securities
exchanges on which the securities may be listed.
If underwriters are used in the sale, the securities will be acquired by the
underwriters for their own account and may be resold from time to time in one
or more transactions, at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, or at prices related to such
prevailing market prices, or at negotiated prices. The securities may be
offered to the public either through underwriting syndicates represented by
one or more managing underwriters or directly by one or more of such firms.
Unless otherwise set forth in the prospectus supplement, the obligations of
the underwriters to purchase the
30
securities will be subject to customary conditions precedent and the
underwriters will be obligated to purchase all the offered securities if any
are purchased. Any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers may be changed from time
to time.
Any agent involved in the offer or sale of the securities in respect of
which this prospectus is delivered will be named, and any commissions payable
by A&P to such agent will be set forth, in the accompanying prospectus
supplement. Unless otherwise indicated in the prospectus supplement, any such
agent will be acting on a best efforts basis for the period of its
appointment.
Underwriters, dealers and agents may be entitled, under agreements entered
into with A&P, to indemnification by A&P against civil liabilities, including
liabilities under the Securities Act or to contribution by A&P to payments
they may be required to make in respect thereof.
Certain of the underwriters, agents or dealers and their associates may
perform services for A&P in the ordinary course of business.
LEGAL MATTERS
Certain legal matters in connection with the securities will be passed upon
for A&P by Cahill Gordon & Reindel (a partnership including a professional
corporation), New York, New York. Certain matters of Delaware law relating to
the validity of the preferred trust securities will be passed upon for A&P and
the trusts by Richards, Layton & Finger, P.A.
EXPERTS
The financial statements incorporated in this prospectus by reference from
The Great Atlantic & Pacific Tea Company, Inc.'s Annual Report on Form 10-K
for the year ended February 27, 1999 have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report, which is incorporated
herein by reference, and has been so incorporated in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
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[photo omitted] [photo omitted]
[A&P logo]
Supermarket of Choice
[photo omitted] [photo omitted]
$275,000,000
[A& P Logo]
9 1/8% Senior Notes
due 2011
------------------------
PROSPECTUS SUPPLEMENT
December 14, 2001
PROSPECTUS
June 21, 1999
------------------------
LEHMAN BROTHERS
GOLDMAN, SACHS & CO.
MORGAN STANLEY
SCOTIA CAPITAL