Exhibit 13
The Great Atlantic & Pacific Tea Company, Inc.
Fiscal 2001
Annual Report to Stockholders
Table of Contents
- -----------------
Comparative Highlights................................................. 3
CEO Letter to Stockholders............................................. 4
Management's Discussion and Analysis................................... 8
Statements of Consolidated Operations.................................. 27
Statements of Consolidated Stockholders' Equity
And Comprehensive (Loss) Income................................. 28
Consolidated Balance Sheets............................................ 29
Statements of Consolidated Cash Flows.................................. 30
Notes to Consolidated Financial Statements............................. 31
Management's Report on Financial Statements............................ 71
Independent Auditors' Report........................................... 72
Five Year Summary of Selected Financial Data........................... 73
Executive Officers..................................................... 75
Board of Directors..................................................... 75
Stockholder Information................................................ 76
2
The Great Atlantic & Pacific Tea Company, Inc.
Comparative Highlights
(Dollars in thousands, except per share amounts)
Fiscal 2000 Fiscal 1999
Fiscal 2001 As Restated (d) As Restated (d)
----------------- ---------------- -----------------
Sales $ 10,973,315 $ 10,622,866 $ 10,151,334
(Loss) income from operations (a) (23,524) 66,030 147,082
(Loss) income before
extraordinary item (64,684) (19,500) 35,313
Net (loss) income (b) (71,906) (19,500) 35,313
(Loss) income per share before
extraordinary item - basic
and diluted (1.69) (0.51) 0.92
Net (loss) income per share - basic
and diluted (1.88) (0.51) 0.92
Cash dividends per share - 0.30 0.40
Expenditures for property 246,182 415,842 479,572
Depreciation and amortization 262,552 255,771 232,712
Working capital 27,611 67,811 65,544
Net debt (c) 806,402 1,039,947 970,342
Stockholders' equity 672,988 748,811 792,138
Debt to total capitalization 57% 58% 56%
Book value per share 17.54 19.53 20.65
New store openings 21 47 54
Number of stores at year end 702 752 750
Number of franchised stores
served at year end 67 68 65
- --------------------------------------------------------------------------------------------------------------------
(a) Asset disposition initiative $(193,468) $ - $(59,886)
Gain on proceeds from insurance
company demutualization 60,606 - -
All other earnings from operations 109,338 66,030 206,968
--------- -------- ---------
(Loss) income from operations $ (23,524) $ 66,030 $ 147,082
========= ======== =========
(b) Asset disposition initiative $(112,268) $ - $ (34,836)
Gain on proceeds from insurance
company demutualization 35,151 - -
Extraordinary loss on early extinguishment
of debt (7,222) - -
All other earnings (losses) 12,433 (19,500) 70,149
--------- -------- ---------
Net (loss) income $ (71,906) $(19,500) $ 35,313
========= ======== =========
(c) Net debt consists of obligations for long-term borrowings and capital
leases reduced by cash equivalents and short-term investments.
(d) See Note 2 - Restatement of Previously Issued Financial Statements in the
Company's Consolidated Financial Statements.
- --------------------------------------------------------------------------------
3
Company Profile
- ---------------
The Great Atlantic & Pacific Tea Company, Inc. ("the Company"), based in
Montvale, New Jersey, operates combination food and drug stores, conventional
supermarkets and limited assortment food stores in 16 U.S. states, the District
of Columbia and Ontario, Canada, under the A&P(R), Waldbaum's(TM), Super
Foodmart, The Food Emporium(TM), Super Fresh(R), Farmer Jack(R), Kohl's,
Sav-A-Center(R), Dominion(R), Ultra Food & Drug, Food Basics(TM) and The Barn
Markets trade names. Through its Compass Foods Division, the Company also
manufactures and distributes a line of whole bean coffees under the Eight
O'Clock(R), Bokar(R) and Royale(TM) labels, both for sale through its own stores
as well as other retail channels.
CEO Letter to Stockholders
- --------------------------
To Our Stockholders:
Fiscal 2001 was a year in which we made solid progress despite facing
many challenges. A&P achieved improved results from ongoing operations and
implemented significant organizational changes.
Shortly before we planned to file our annual report, we discovered
certain irregularities relating to the appropriate timing for the recognition of
vendor allowances and the accounting for inventory. We promptly commenced a
Company-wide review of these accounting issues. As a result of this review, we
have restated our financial results for certain periods to reflect, among other
changes outlined below, the appropriate timing for the recognition of certain
vendor allowances received and to reflect the appropriate accounting for a small
amount of inventory associated with a single region. We are in the process of
implementing additional procedural changes designed to prevent such
irregularities in the future.
Once we decided to restate our financial statements for the reasons
stated above, we also reviewed all our accounting for the restated years and,
determined that it was appropriate to restate our accounting for vendor
allowances, self-insurance reserves and closed store sublease income. Footnote 2
of our Financial Statements more fully discusses these matters.
The fiscal year ended February 23, 2002 marked our return to net
profitability, achieved in the second quarter, and our 15th consecutive quarter
of improved comparable store sales.
Our successful rebound from the challenges of the previous year, despite
the persistent economic uncertainty that intensified after the tragic events of
September 11, was first and foremost the result of a clear strategic direction
and our focus on five key priorities:
4
o Achieve operational excellence;
o Implement our supply chain and business process initiative;
o Reduce all costs;
o Identify profitable growth opportunities in our core markets; and
o Align and strengthen our organization through performance
management.
Comprehensive programs addressing all of those objectives were emphasized
in fiscal 2001, enabling us to reverse and steadily improve our earnings trend,
while preserving a rate of comparable store sales growth that was among the best
in our industry.
We significantly strengthened our balance sheet and secured our long-term
liquidity by reducing total net debt by $234 million, and issuing $275 million
in new 10 year notes. We have the financing in place to complete our strategic
infrastructure investments, and with our improving operating results, we expect
to further strengthen our financial position.
Our productivity and cost reduction efforts included rigorous asset
management and strategic sourcing programs to lower both inventory and supply
expenses. We also reduced administrative costs and established strict controls
to better manage overhead going forward.
Through the aligned efforts of corporate, regional and field management,
we sharpened our focus on store operating fundamentals and labor standards,
execution of merchandising programs and improvement of our customer service
capability throughout the year. While the opportunity to further enhance
performance in these areas is substantial, our improved results, market share
growth and positive customer feedback confirm our solid progress at the store
level.
We also acted to improve the overall quality and growth potential of our
store network with our decision to close 39 under performing stores, as part of
the asset disposition program announced in November of 2001. This will enable us
to direct our efforts and resources to locations we believe will contribute
strong top and bottom line results going forward.
5
We continued to modernize our store base in fiscal 2001, adding 21 new
stores and remodeling 26. Our fiscal 2002 capital plan calls for 25 new stores,
and 70-75 enlargement and remodeling projects. This reflects our strategy to
increase investment in the improvement of existing stores to drive profitable
growth within our core operations. Overall, we have established more rigorous
standards for the evaluation of all capital improvement projects, to ensure
their success and maximize our return on capital invested.
The Company's business process initiative advanced in 2001, as we began
to realize benefits from the initial elements in place. We enhanced the
productivity and effectiveness of our Supply & Logistics operations by
implementing our new warehouse and transportation management systems. The
ongoing improvement of our distribution capability, combined with the closure of
two warehouses, will further improve service levels while also reducing costs.
Additional progress in this important initiative lies immediately ahead,
with the upcoming implementation of our category management and merchandising
systems. We are confident that over the next year, we will remain on track to
execute the remaining phases of the initiative, and realize the systemic and
financial benefits as planned.
On the all-important people side of our business, we made positive
strides in our organizational development efforts. Our annual company-wide
associate opinion survey, performed in conjunction with The Gallup Organization,
again provided valuable insights into the ability of our management to engage
our associates in the initiatives of the Company at all levels. Participation in
the survey increased in fiscal 2001, as did our overall employee engagement
ratings. We expect to further improve those results as we move forward with the
input of our associates in mind.
A number of key appointments strengthened our executive and regional
management in the latter part of the year. The appointment of Elizabeth R.
Culligan as President & Chief Operating Officer and her election to our Board of
Directors reflect her significant contributions during her first year with A&P.
Also strengthening our senior management was the promotion of Mitchell P.
Goldstein to Senior Vice President & Chief Financial Officer, succeeding Fred
Corrado who retired after a successful career with A&P.
6
Additionally, the promotions of John E. Metzger to Senior Vice President
& Chief Information Officer, and David Smithies to President of our Atlantic
Region, have to further strengthen our management.
Finally, we upgraded our expertise and competency in such critical
disciplines as marketing, information services and supply & logistics, to
provide the functional leadership necessary to our ongoing success.
Going forward in fiscal 2002, we are planning and managing our business
in anticipation of a difficult economic and competitive environment. I am
confident that our experienced management team, clear strategy and improving
store network and support organization will help to maximize our performance in
these challenging times, and position us for the growth opportunities that lie
ahead.
On behalf of our Board of Directors and Management, my thanks to all of
our associates, customers, suppliers and stockholders for their support in
fiscal 2001, especially in light of the issues with which we were recently
confronted. We look forward to better serving each of these vital constituencies
in 2002 and beyond, as we strive to achieve our ultimate mission . . . to become
The Supermarket of Choice(R), where people choose to shop, work, and invest.
Christian Haub
Chairman of the Board
& Chief Executive Officer
July 3, 2002
7
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis
INTRODUCTION
- ------------
This Management's Discussion and Analysis describes matters considered by
Management to be significant to understanding the financial position, results of
operations and liquidity of the Company, including a discussion of the results
of operations as well liquidity and capital resources. These items are presented
as follows:
o Basis of Presentation - discusses the Company's fiscal year end
o Restatement of Previously Issued Financial Statements - a discussion of the
causes of the restatement and its impact on the Company's previously issued
financial statements
o Operating Results and Liquidity and Capital Resources - a discussion of
results, significant business initiatives, current and expected future
liquidity, and the impact of various market risks on the Company
o Critical Accounting Policies - a discussion of significant estimates made by
Management
o Impact of New Accounting Pronouncements - a discussion of authoritative
pronouncements that have been or will be adopted by the Company
BASIS OF PRESENTATION
- ---------------------
The Company's fiscal year ends on the last Saturday in February. Fiscal
2001 ended February 23, 2002, fiscal 2000 ended February 24, 2001 and fiscal
1999 ended February 26, 2000. Fiscal 2001, fiscal 2000 and fiscal 1999 were each
comprised of 52 weeks. Except where noted, all net income per share data
presented is both basic and diluted.
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
- -----------------------------------------------------
As discussed in Note 2 to the consolidated financial statements, the
Company restated its financial statements for fiscal 1999 and 2000 and its
supplementary financial information for the first three quarters of fiscal 2001
to reflect the correction of accounting errors referred to below. In addition,
as discussed in Notes 2, 9 and 13, the Company has revised such notes to the
financial statements to correct classification errors between its United States
Retail operations and its Canada Retail operation and to provide additional
disclosures regarding the restatement.
Prior to filing its 2001 Annual Report on Form 10-K, the Company
discovered certain irregularities relating to the timing for the recognition of
vendor allowances and the accounting for certain inventory. As the Company
announced on May 24, 2002, it promptly commenced a review of these issues. This
review caused the Company to delay filing its Annual Report on Form 10-K. As a
result of the accounting errors discovered during this review, the Company has
restated its financial statements for fiscal 1999 and fiscal 2000, and
supplementary unaudited financial information for the first, second and third
quarters of fiscal 2001. In addition, the Company has determined that its
financial statements should also be restated to correct other accounting errors
for 1) the timing of the recognition of certain other vendor allowances which
were not accounted for in accordance with generally accepted accounting
principles ("GAAP"), 2) the use of a method of estimating self-insurance
reserves which did not comply with GAAP, and 3) the recognition of sublet income
associated with certain closed stores which did not comply with GAAP. The
summary of the effects of restatement are presented in the tables below entitled
"Overall Impact of Restatement".
8
Overall Impact of the Restatement
- ---------------------------------
The schedules below show the effects of the restatement on reported
earnings for each of the years presented. As noted, the Company does not have
sufficient documentation to determine the impact of the restatement on the
recognition of vendor allowances prior to fiscal 1999. The restatement has the
aggregate effect of decreasing retained earnings by $75 million as of February
27, 1999. This amount had previously been reported as net income in years prior
to fiscal 1999 using accounting methods that did not conform with GAAP. In
general, the Company's prior methodologies understated its reported earnings in
the most recent three fiscal years. This resulted from errors in accounting from
reduced recognition of vendor allowance credits and increased recognition of
self-insurance claims expense in order to reduce the balance sheet underaccruals
for these matters. The impact on retained earnings as of February 27, 1999 and
net income for fiscal 1997 through fiscal 2001 is detailed in the table below.
The Company has restated its financial statements to properly present its
results of operations and financial condition in accordance with GAAP.
Before Tax
- ----------
Earnings
Increase (Decrease)
Earnings Impact on --------------------------------
Increase (Decrease) retained Prior
-------------------------- earnings to
Fiscal Fiscal Fiscal ------------- Fiscal Fiscal Fiscal
2001 2000 1999 Feb. 27, 1999 1998(a) 1997(a) 1997(a)
----- ----- ----- ------------- ------- ------- -------
(Dollars In Millions)
Vendor allowances
Irregularities (8.5) (3.5) (4.2) - - - -
Non-GAAP policy 17.0 17.3 13.9 (55.5) (a) (a) (a)
Perishable inventory irregularity (0.7) (0.4) (0.3) - - - -
Self-insurance reserves 11.3 (1.3) 26.6 (48.1) 14.9 (2.9) (60.1)
Closed store subleases 1.0 (2.7) (0.1) (23.9) 0.2 9.9 (33.9)
------ ---- ----- ----- ----- ----- -----
Pre-tax impact of restatement 20.1 9.4 35.9 (127.5) 15.1 7.0 (94.0)
(Provision for) benefit from
income taxes (8.5) (3.8) (14.7) 52.3 (6.2) (2.9) 38.5
------ ---- ----- ----- ----- ----- -----
Total impact of restatement 11.6 5.6 21.2 (75.2) 8.9 4.1 (55.5)
====== ==== ===== ===== ===== ===== =====
9
Effect on Net Income
- --------------------
Net Earnings
Impact Increase (Decrease)
Net Earnings on --------------------------------
Increase (Decrease) retained Prior
-------------------------- earnings to
Fiscal Fiscal Fiscal ------------- Fiscal Fiscal Fiscal
2001 2000 1999 Feb. 27, 1999 1998(a) 1997(a) 1997(a)
----- ----- ----- ------------- ------- ------- -------
(In Millions)
Vendor allowances
Irregularities (4.9) (2.1) (2.5) - (a) (a) (a)
Non-GAAP policy 9.8 10.2 8.2 (32.7) - - -
Perishable inventory irregularity (0.4) (0.2) (0.2) - - - -
Self-insurance reserves 6.5 (0.8) 15.7 (28.4) 8.8 (1.7) (35.5)
Closed store subleases 0.6 (1.5) - (14.1) 0.1 5.8 (20.0)
----- ---- ----- ------ ---- ---- -----
Total impact of restatement 11.6 5.6 21.2 (75.2) 8.9 4.1 (55.5)
===== ==== ===== ===== ==== ==== =====
(a) The Company is unable to determine the adjustments to correct the vendor
allowance amounts recognized for years prior to fiscal 1999 since
sufficient documentation related to these items is not available.
Specifically, the Company did not have sufficient detail for three-year
contracts entered into prior to fiscal 1996. However, the Company did have
sufficient detail for three-year contracts starting in 1996 and was,
therefore, able to determine the retained earnings impact at February 27,
1999 as well as the impact to earnings in fiscal 1999, 2000 and 2001.
Irregularities
- --------------
As referred to above, the Company discovered certain irregularities with
respect to accounting for vendor allowances and perishable inventory. The
resultant review identified that certain employees circumvented the Company's
system of internal controls resulting in accounting errors. With respect to
vendor allowances, those errors caused valid allowances generally to be
recognized before they were earned. With respect to perishable inventories, the
irregularities related to overstatement of inventory due to inappropriate
adjustments made to physical counts, causing errors in the periods presented in
the tables above. Correction of the vendor allowances errors has resulted in a
deferral of $12.1 million as of February 23, 2002 allowances as part of the
balance discussed in the "Vendor Allowances" caption below. The Company has
modified certain procedures and is in the process of implementing additional
procedural changes designed to prevent such irregularities in the future.
Vendor Allowances
- -----------------
Prior to fiscal 1997, the Company recognized vendor allowances for
certain one-year and multi-year allowance contracts as cash was received since
the Company believed that such amounts received were non-refundable and that no
future performance was required. In fiscal 1997, the Company implemented a new
accounting policy whereby the amount of allowances recognized was limited to the
amount of such allowances recognized in the prior year. Allowances in excess of
such limit were deferred and were not amortized. Neither policy was in
conformity with GAAP. The Company's methods resulted in the overstatement of its
reported earnings in the aggregate prior to fiscal 1997. Furthermore, the policy
implemented in fiscal 1997 had the effect of reducing its reported earnings in
subsequent periods as the Company limited its recognition of these allowances in
order to increase its accrual for unearned allowances. Also, the volume of these
transactions have been decreasing in recent years, further causing the
allowances recognized in recent years to be less than they would have been if
all contracts had previously been deferred and recognized over their term in
accordance with GAAP. On an aggregate basis, earnings were overstated by $55.5
million pre-tax ($32.7 million after tax) prior to February 27, 1999. The
Company's financial statements have been restated to correct this accounting
error in order to recognize the allowances as they were earned over the lives of
the contracts as discussed in Note 1 under "Vendor Allowances". The Company has
deferred vendor allowances aggregating $64 million as of February 23, 2002 which
are expected to be recognized as reductions to cost of merchandise sold
generally through fiscal 2004. See "Overall Impact of Restatement" above for the
amount of such restatement.
Self-Insurance Reserves
- -----------------------
The Company's business results in significant risks that the Company
self-insures. These risks relate primarily to customer and employee accidents.
The Company estimates and records the present value of the expected self-insured
portion of the cost of such accidents and related liability matters as
self-insurance reserves. The Company's previous method of establishing its
self-insurance reserves was not appropriate because it did not adequately
consider its historical loss experience resulting from the frequency (number of
incidents) and severity (ultimate cost) of claims. It also improperly included
adjustments to reduce the reserve in anticipation of future improvement in
expected loss experience resulting from planned risk management changes intended
to reduce the frequency and severity of future claims. This method was not in
conformity with GAAP. Accordingly, the Company has restated its financial
statements to correct this accounting error by reflecting its self-insurance
reserves on the basis of actuarially determined estimates. The Company's prior
method resulted in overstatement of its reported earnings in the aggregate prior
to fiscal 1997. In recent years the Company had generally reduced its reported
earnings as it accrued these costs at rates in excess of its actual development
of the underlying claims. The Company's restated self-insurance reserves are
$90.0 million, $100.0 million and $97.5 million at the end of fiscal 2001, 2000
and 1999 respectively. The reserve is impacted by and was determined as of each
report date based upon the Company's information regarding frequency and
severity, among other factors, which was available at each report date. The
Company's frequency decreased approximately 10% from fiscal 1999 through fiscal
2001; severity was relatively unchanged during this period. These reserves
represent the present value of the estimated self-insured portion of claims,
including claims incurred but not reported. Such claims generally are expected
to be paid within five years, although payments on some employee accident claims
extend beyond this period. See "Overall Impact of Restatement" above for the
amount of such restatement.
10
Closed Store Subleases
- ----------------------
In the normal course of business, the Company closes stores periodically.
For stores closed that are under long-term leases, the Company records a
liability for future minimum lease payments and related costs, such as utilities
and taxes, from the date of closure to the end of the remaining lease term, net
of estimated probable cost recoveries from sublease rentals. In some cases, the
Company subleases the stores for amounts in excess of its own related costs
under its lease. Under the Company's prior accounting method, such excess of
sublease amounts were recorded as an offset to the cost of closure of other
locations. Such a methodology was not in conformity with GAAP. Accordingly, the
Company has restated its financial statements to correct this accounting error
by recognizing those sublease excesses ratably as income over the term of the
sublease. The Company's prior accounting method had the effect of overstating
reported earnings in the period in which a sublease was entered into, by the
amount that total sublease rental exceeded the lease obligations, and decreasing
reported earnings in the subsequent periods in which the excess should have been
recognized. Excess sublease amounts expected to be recognized in future periods
approximate $5 million for fiscal 2002 and amortizes at decreasing amounts over
a period of several years. See "Overall Impact of Restatement" above for the
amount of such restatements. The Company's prior methodology had no effect on
stores closed as part of the Asset Disposition Initiative discussed in Note 3 of
the Company's Consolidated Financial Statements.
The impact of the restatement on certain key financial indicators is as
follows:
Fiscal Fiscal Fiscal Fiscal Fiscal
2001(a) 2000 1999 1998 (b) 1997 (b)
------------- -------------- ------------- ------------- --------------
Sales (no restatement adjustments) $10,973,315 $10,622,866 $10,151,334 $10,179,358 $10,262,243
Gross margin as a percentage of sales
As previously announced and
reported 28.64% 28.51% 28.64% 28.68% 28.60%
As restated 28.71% 28.63% 28.74% (b) (b)
Selling, general and administrative
expense as a percentage of sales
As previously announced and
reported 29.63% 28.04% 27.61% 30.29% 27.09%
As restated 29.48% 28.01% 27.29% 30.15% 27.02%
Income (loss) per share
As previously reported (2.18) (0.65) 0.37 (1.75) 1.65
As restated (1.88) (0.51) 0.92 (1.52) 1.76
(a) Fiscal 2001 results as previously announced represent amounts presented in
the Company's 4th quarter fiscal 2001 earnings release on April 4, 2002.
(b) The Company is unable to determine the adjustments to the vendor allowance
amounts, which would have affected cost of merchandise sold and gross
margin, for years prior to fiscal 1999 since sufficient documentation
related to these items is not available.
11
The comparative effects of the restatement on amounts previously reported
in our fiscal 2000 and 1999 financial statements are summarized in Note 2 to the
consolidated financial statements. The following is a summary of the significant
effects of the restatement on the Company's operating results for fiscal year
2001:
As
Previously As
Announced (a) Adjustments Revised
---------------- --------------- ----------------
Dollars in Thousands
Fiscal 2001
- -----------
Statement of Consolidated Operations
- ------------------------------------
Cost of merchandise sold $ (7,830,411) $ 7,762 $ (7,822,649)
Gross margin 3,142,904 7,762 3,150,666
Store operating, general and administrative expense (3,251,796) 17,000 (3,234,796)
Income from operations (48,286) 24,762 (23,524)
Interest expense (87,022) (4,700) (91,722)
(Loss) income before income taxes and extraordinary item (128,336) 20,062 (108,274)
Benefit from (provision for) income taxes 52,016 (8,426) 43,590
(Loss) income before extraordinary item (76,320) 11,636 (64,684)
Net (loss) income (83,542) 11,636 (71,906)
Net (loss) income - basic and diluted $ (2.18) $ 0.30 $ (1.88)
(a) Fiscal 2001 results as previously announced represent amounts presented in
the Company's 4th quarter fiscal 2001 earnings release on April 4, 2002.
The impact on the Company's Balance Sheet for fiscal 2001 were increases
to current assets, total assets and total liabilities of $3,071, $28,339 and
$65,189, respectively, and decreases to total stockholders' equity and working
capital of $36,850 and $18,852, respectively.
The effects of the restatement on the unaudited supplementary quarterly
financial information for fiscal 2000 and 2001 are presented in Note 18. In
addition, the effects of the restatement have been incorporated, where
applicable, in this Management's Discussion and Analysis.
12
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
OPERATING RESULTS
- -----------------
Fiscal 2001 Compared with 2000
- ------------------------------
OVERALL
- -------
Sales for fiscal 2001 were $11.0 billion, compared with $10.6 billion in
fiscal 2000; comparable store sales increased 2.6%. Net loss per share for
fiscal 2001 was $1.88. Included in the Company's results for fiscal 2001 was an
extraordinary after tax loss of $7 million or $0.19 per share for the cost of
repurchasing $178 million of its 7.70% Senior Notes due January 15, 2004 and $20
million of its 7.75% Notes due April 15, 2007, a $193 million charge ($112
million after tax or $2.88 per share - diluted) relating to its asset
disposition initiative (see Note 3 of the Company's Consolidated Financial
Statements), and a nonrecurring pretax gain of $61 million ($35 million after
tax or $0.90 per share - diluted) from proceeds received as a result of the
demutualization of The Prudential Insurance Company.
The following schedule details the adjustments from "as reported" to "as
adjusted" results for fiscal 2001:
Adjustments to be (added) subtracted
--------------------------------------------
(In millions) Fiscal 2001 Asset Fiscal 2001 Fiscal 2000
results as disposition Extraordinary Gain on results as results
reported initiative loss proceeds adjusted As Restated*
-------------- ------------- ------------- ------------- ------------- -------------
Sales $ 10,973.3 $ - $ - $ - $ 10,973.3 $10,622.9
Cost of merchandise sold (7,822.6) (3.9) - - (7,818.7) (7,581.1)
----------- ----------- ---------- -------- ----------- -----------
Gross margin 3,150.7 (3.9) - - 3,154.6 3,041.8
Rate to sales 28.71% 28.75% 28.63%
Store operating, general
and administrative expense (3,234.8) (189.6) - - (3,045.2) (2,975.7)
Rate to sales 29.48% 27.75% 28.01%
Gain on proceeds from the
demutualization of a mutual
insurance company 60.6 - - 60.6 - -
----------- ------------ ---------- -------- ----------- ------------
(Loss) income from operations (23.5) (193.5) - 60.6 109.4 66.1
Interest expense (91.7) - - - (91.7) (102.5)
Interest income 6.9 - - - 6.9 6.2
----------- ------------ ---------- -------- ----------- ------------
(Loss) income before income
taxes and extraordinary item (108.3) (193.5) - 60.6 24.6 (30.2)
Benefit from (provision for)
income taxes 43.6 81.2 - (25.5) (12.1) 10.7
----------- ------------ ---------- -------- ----------- ------------
(Loss) income before
extraordinary item (64.7) (112.3) - 35.1 12.5 (19.5)
Extraordinary loss on early
extinguishment of debt,
net of income tax benefit
of $5.2 (7.2) - (7.2) - - -
----------- ------------ ---------- -------- ----------- ------------
Net (loss) income $ (71.9) $ (112.3) $ (7.2) $ 35.1 $ 12.5 $ (19.5)
=========== =========== ========== ======== =========== ============
* See Note 2 - Restatement of Previously Issued Financial Statements in the
Company's Consolidated Financial Statements.
13
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
SALES
- -----
Sales for fiscal 2001 of $10,973 million increased $350 million or 3.3%
from sales of $10,623 million for fiscal 2000. The higher sales were due to
increases in retail sales of $304 million and wholesale sales of $46 million.
The increase in retail sales was attributable to the opening of 68 new stores
since the beginning of fiscal 2000, of which 21 were opened in fiscal 2001,
increasing sales by $535 million. This increase was partially offset by the
closure of 121 stores since the beginning of fiscal 2000, of which 72 were
closed in fiscal 2001, which decreased sales $437 million. Included in the 72
stores closed in fiscal 2001 were 31 stores closed as part of the asset
disposition initiative. Additionally, the unfavorable effect of the Canadian
exchange rate decreased sales $81 million. The remainder of the increase in
sales was caused primarily by increased comparable store sales, which include
replacement stores, for fiscal 2001 of 2.6% (1.5% in the U.S. and 7.8% in
Canada) when compared to fiscal 2000. The increase in wholesale sales was
attributable to higher sales volume of $76 million partially offset by the
unfavorable effect of the Canadian exchange rate which decreased sales by $30
million.
Sales in the U.S. increased by $243 million or 2.9% compared to fiscal
2000. Sales in Canada increased by $107 million or 4.5% from fiscal 2000.
Average weekly sales per supermarket were approximately $275,100 for
fiscal 2001 versus $263,000 for the corresponding period of the prior year, an
increase of 4.6%.
GROSS MARGIN
- ------------
Gross margin as a percentage of sales increased 8 basis points to 28.71%
for fiscal 2001 from 28.63% for fiscal 2000. The gross margin dollar increase of
$109 million resulted from increases in sales volume and the gross margin rate
partially offset by a decrease in the Canadian exchange rate. The U.S.
operations gross margin increase of $80 million resulted from increases of $74
million due to higher sales volume and $6 million due to a higher gross margin
rate. The Canadian operations gross margin increase of $28 million resulted from
increases of $48 million due to higher sales volume and $5 million due to a
higher gross margin rate partially offset by a decrease of $25 million from
fluctuations in the Canadian exchange rate.
Included in gross margin for fiscal 2001 were costs related to the
Company's asset disposition initiative of $4 million which were incurred to mark
down inventory in stores announced for closure. Excluding this charge, as a
percentage of sales, gross margin would have been 28.75% and 28.63% for fiscal
2001 and fiscal 2000, respectively.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
Store operating, general and administrative expense ("SG&A") was $3,235
million for fiscal 2001 compared to $2,976 million for fiscal 2000. As a
percentage of sales, SG&A was 29.48% for fiscal 2001 compared to 28.01% for
fiscal 2000.
14
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Included in SG&A for fiscal 2001 were costs relating to the Company's
asset disposition initiative of $190 million as described in Note 3 of the
Consolidated Financial Statements. Excluding this charge, SG&A was $3,045
million or 27.75% as a percentage of sales. Also included in SG&A for fiscal
2001 and fiscal 2000 were costs relating to the Company's business process
initiative of $91 million and $68 million, respectively. These costs primarily
included professional consulting fees and salaries, including related benefits,
of employees working full-time on the initiative. Excluding these charges, SG&A
was $2,954 million or 26.92% for fiscal 2001 compared to $2,908 million or
27.37% for fiscal 2000. This decrease of 45 basis points was primarily due to
lower store advertising costs, lower store opening and closing costs, and lower
litigation expense.
GAIN ON PROCEEDS FROM THE DEMUTUALIZATION OF A MUTUAL INSURANCE COMPANY
- -----------------------------------------------------------------------
During the fourth quarter of fiscal 2001, the Company received cash and
common stock totaling $61 million from the demutualization of The Prudential
Insurance Company. This amount was recorded as a nonrecurring gain and included
in the determination of pretax income for fiscal 2001.
INTEREST EXPENSE
- ----------------
Interest expense of $92 million for fiscal 2001 decreased from the prior
year amount of $102 million. This was due to decreased borrowing requirements
during fiscal 2001 compared to fiscal 2000 as a result of lower capital
expenditures, a reduction in working capital and the proceeds received on the
sale leaseback transactions described in Note 14 of the Consolidated Financial
Statements. The reduction was also partially due to a decrease in interest
rates.
Fiscal 2000 Compared with 1999
- ------------------------------
OVERALL
- -------
Sales for fiscal 2000 were $10.6 billion, compared with $10.2 billion in
fiscal 1999; comparable store sales increased 2.2%.
Net loss per share for fiscal 2000 was $0.51 compared to net income per
share of $0.92 for fiscal 1999. Included in the results for fiscal 1999 were
costs related to the Company's asset disposition initiative of $103 million
pretax which consisted of $60 million of costs related to the store exiting
charges and $43 million of operating costs incurred by the stores identified for
closure prior to ceasing operations. Excluding the aforementioned charge, net
income per share was $2.48 in fiscal 1999.
15
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
SALES
- -----
Sales for fiscal 2000 of $10,623 million increased $472 million or 4.6%
from the prior year. The increase in sales was 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 which added 2.2 million retail square feet
partially offset by closing 49 stores, which reduced retail square footage by
1.4 million. Comparable store sales, which include replacement stores, increased
2.2% in fiscal 2000 (1.6% in the U.S. and 4.9% in Canada).
Sales in the U.S. for fiscal 2000 increased by $266 million or 3.3%
compared to fiscal 1999. Sales in Canada for fiscal 2000 increased $206 million
or 9.5% from fiscal 1999.
Average weekly sales per supermarket were approximately $263,000 for
fiscal 2000 versus $245,700 for fiscal 1999, an increase of 7.0%.
GROSS MARGIN
- ------------
Gross margin as a percentage of sales decreased 11 basis points to 28.63%
for fiscal 2000 from 28.74% for fiscal 1999. The gross margin dollar increase of
$125 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 $98 million resulted from increases of $81
million due to higher sales volume and $17 million due to a higher gross margin
rate. The Canadian operations gross margin increase of $27 million resulted from
an increase of $54 million due to higher sales volume partially offset by a
decrease of $20 million due to a lower gross margin rate and a decrease of $7
million from fluctuations in the Canadian exchange rate.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
SG&A was $2,976 million for fiscal 2000 compared to $2,770 million for
fiscal 1999. As a percentage of sales, SG&A increased from 27.29% in fiscal 1999
to 28.01% in fiscal 2000.
The SG&A expense for fiscal 2000 included $68 million relating to the
Company's business process initiative. Such costs primarily included
professional consulting fees and salaries, including related benefits, of
employees working full-time on the initiative.
16
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
The SG&A expense for fiscal 1999 included $122 million relating to the
asset disposition initiative announced in fiscal 1998, including $75 million of
costs related to the store exiting charges and $69 million of operating costs
incurred by the stores identified for closure prior to ceasing operations. This
was partially offset by reversals of previously recorded restructuring charges
due to favorable progress in marketing and subleasing the closed stores of $22
million.
Excluding the aforementioned charges and the results of the stores
identified for closure previously noted, as a percentage of sales, SG&A
increased from 26.50% for fiscal 1999 to 27.37% for fiscal 2000. The increase of
87 basis points was primarily due to higher labor, occupancy and store closing
costs in fiscal 2000.
INTEREST EXPENSE
- ----------------
Interest expense for fiscal 2000 increased $12 million or 13.3% 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.
ASSET DISPOSITION INITIATIVE
- ----------------------------
In May 1998, the Company initiated an assessment of its business
operations in order to identify the factors that were impacting the performance
of the Company. As a result of this assessment, in fiscal 1998 and fiscal 1999,
the Company announced a plan to close two warehouse facilities and a coffee
plant in the U.S., a bakery plant in Canada and 166 stores including the exit of
the Richmond, Virginia and Atlanta, Georgia markets.
As of February 23, 2002, the Company had closed all stores and facilities
related to this phase of the initiative. Additionally, the Company paid $29
million of the total net severance charges from the time of the original charges
through February 23, 2002, 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.
At each balance sheet date, Management assesses the adequacy of the
reserve balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. The Company has made favorable
progress to date in marketing and subleasing the closed stores. As a result, in
the third quarter of fiscal 1999, the Company recorded a net reduction in SG&A
of $22 million to reverse a portion of the original charge. This amount
primarily represents a reduction in SG&A for lower store occupancy costs
resulting from earlier than anticipated lease terminations and subleases.
Additionally, in fiscal 2000, the Company recorded a net reduction in SG&A of $3
million to reverse a portion of the original charge. The reversal is primarily
the result of a change in estimate resulting from the sale of one of the
Company's warehouses sold during the first quarter of fiscal 2000.
17
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from Management's review of the performance and
potential of each of the Company's businesses and individual stores. At the
conclusion of this review, the Company determined that certain underperforming
operations, including 39 stores (30 in the United States and 9 in Canada) and 3
warehouses should be closed and/or sold, and certain administrative streamlining
should take place. As a result of these decisions, the Company announced on
November 14, 2001 that it would incur costs of approximately $200 - $215 million
pretax ($115 - $125 million after tax) through the third quarter of fiscal 2002.
Of this amount, $193 million pretax ($112 million after tax) was included in the
Statements of Consolidated Operations for fiscal 2001. The components of this
net pretax charge were as follows:
o $180 million of costs to close the stores and warehouses and perform certain
administrative streamlining, of which $64 million related to the present
value of future occupancy obligations, $85 million related to the write-down
of fixed assets, $24 million related to severance for store and
administrative personnel and $7 million related to other miscellaneous items;
o $21 million of costs to discontinue development of 4 potential stores of
which $17 million related to the present value of future occupancy
obligations and $4 million related to fixed asset write-offs; and
o $8 million in gains on the sale of other properties and equipment, primarily
land and buildings.
Of this pretax charge, $4 million was included in "Cost of merchandise
sold" and $189 million was included in "Store operating, general and
administrative expense" in the Statements of Consolidated Operations for fiscal
2001.
To the extent fixed assets included in the items noted above could be
used in other continuing operations, the Company will transfer those assets as
needed. Fixed assets that the Company cannot transfer to other operations will
be scrapped. Accordingly, the write-down recorded during fiscal 2001 was based
on expected transfers.
As of February 23, 2002, the Company had closed 31 of the aforementioned
stores.
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 of such assessment,
during the fourth quarter of fiscal 2001, the Company recorded an adjustment to
severance and benefits of approximately $1 million related to a reduction in the
severance payments required to be made to certain store employees in Canada.
Under Ontario provincial law, employees to be terminated as part of a mass
termination are entitled to receive compensation, either worked or paid as
severance, for a set period of time after the official notice date. Since such
closures took place later than originally expected, less time remained in the
aforementioned guarantee period.
18
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
As of February 23, 2002, the Company paid approximately $3 million of the
total severance charge recorded to date which resulted from the termination of
approximately 850 employees. The remaining individual severance payments will be
paid by the end of fiscal 2003.
Based upon current available information, Management evaluated the reserve
balances as of February 23, 2002 of $66 million for the 1998 phase of the asset
disposition initiative and $100 million for the 2001 phase of the asset
disposition initiative and has concluded that they are adequate. The Company
will continue to monitor the status of the vacant properties and adjustments to
the reserve balances may be recorded in the future, if necessary.
BUSINESS PROCESS INITIATIVE
- ---------------------------
On March 13, 2000, the Company announced a four-year project to develop a
state-of-the-art supply chain and business management infrastructure.
A team of A&P executives and managers representing all key business
functions is working with a team of strategic alliance consultants concentrating
on the food and drug retailing industry formed by information technology
industry leaders. This combined team is upgrading all processes and business
systems related to the flow of information and products between A&P-operated
offices, distribution points and stores; and between the Company and its
suppliers. Such business processes support Store Operations, Marketing and
Merchandising, Supply and Logistics, People Resources & Services, Finance and
the enabling technologies.
Overall, the Company expects to achieve substantial cash benefits
resulting from improved margins, lower operating expenses, reduced working
capital and better product availability. After implementation is completed in
fiscal 2003, the Company expects to significantly raise the level of ongoing
annual operating income.
Costs related to implementing this initiative reduced diluted net
earnings for fiscal 2001 and 2000 by $1.46 and $1.15 per share, respectively.
The Company expects the cost of implementing this initiative to reduce net
earnings for fiscal 2002 by approximately $1.10 - $1.20 per share.
19
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company had working capital of $28 million at February 23, 2002
compared to $68 million at February 24, 2001. The Company had cash and cash
equivalents aggregating $169 million at the end of fiscal 2001 compared to $132
million at the end of fiscal 2000. Working capital of $28 million at February
23, 2002 included $35 million of cash classified as "Cash and cash equivalents"
on the Company's Consolidated Balance Sheets and $27 million of short-term
investments classified as "Prepaid expenses and other current assets" on the
Company's Consolidated Balance Sheets received as a result of the
demutualization of Prudential Insurance Company (see Note 15 of the Company's
Consolidated Financial Statements for further details). After adjusting for this
item, the Company had negative working capital of $35 million at February 23,
2002. Working capital of $68 million at February 24, 2001 included $28 million
of assets held for sale within "Prepaid expenses and other current assets" on
the Company's Consolidated Balance Sheets relating to assets to be sold and
leased back in early fiscal 2001 (see Note 14 of the Company's Consolidated
Financial Statements). Excluding the items described above, the decrease in
working capital was attributable primarily to a decrease in inventories and
increases in book overdrafts and other accruals, partially offset by increases
in accounts receivable and prepaid expenses and other current assets and
decreases in accounts payable and current portion of long-term debt.
On December 14, 2001, the Company issued $275 million 9 1/8% Senior Notes
due December 15, 2011. These notes pay interest semi-annually on June 15 and
December 15 and are callable beginning December 15, 2006. The Company used the
proceeds from the issuance of these notes to repay approximately $178 million of
the total $200 million 7.70% Senior Notes due January 15, 2004 and for general
corporate purposes including repayment of borrowings under the Company's secured
revolving credit agreement. The repayment of approximately $178 million of the
7.70% Senior Notes due January 15, 2004 took place in the form of a tender offer
whereby the Company paid a 6.25% premium to par. In addition, the Company
repurchased in the open market $20 million of its 7.75% Notes due April 15,
2007. The net cost of this tender and open market repurchase resulted in an
extraordinary loss due to the early extinguishment of debt of $7 million after
tax ($12 million pretax). The Company has the right to make additional
repurchases and intends to do so from time to time in the future.
20
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
At February 23, 2002, the Company had a $425 million secured revolving
credit agreement (the "Secured Credit Agreement") expiring December 31, 2003,
with a syndicate of lenders, enabling it to borrow funds on a revolving basis
sufficient to refinance short-term borrowings and provide working capital as
needed. This agreement was secured primarily by inventory and company-owned real
estate. The Secured Credit Agreement was comprised of a U.S. credit agreement
amounting to $340 million and a Canadian credit agreement amounting to $85
million (C$136 million at February 23, 2002). As of February 23, 2002, the
Company had no borrowings under the Secured Credit Agreement. Accordingly, as of
February 23, 2002, after reducing availability for outstanding letters of credit
and inventory requirements, the Company had $367 million available under the
Secured Credit Agreement. Borrowings under the agreement bear interest based on
the variable LIBOR pricing. On March 21, 2002 and April 23, 2002, the Company
amended the Secured Credit Agreement in order to allow for, among other things,
additional debt repayments, the ability to enter additional interest rate
hedging agreements and an increase in the amount of letters of credit available
under the agreement. In addition, $385 million of the initial $425 million of
loan commitments under the original facility scheduled to expire in December
2003 was extended for an additional 18 months and will now expire in June 2005.
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. At February
23, 2002, the Company was in compliance with all of its covenants.
As a result of its delayed filing of the Annual Report on Form 10-K as
described in Note 2 of the Company's Consolidated Financial Statements, the
Company was not in compliance with its reporting covenant and therefore became
unable to draw upon the Secured Credit Agreement. On June 14, 2002 the Company
received a waiver from its lenders allowing it to borrow up to $50 million under
the Secured Credit Agreement through July 29, 2002. The initial filing of the
Company's Annual Report on Form 10-K cured said covenant violation. The filing
delay also caused a covenant violation under the indenture covering the
Company's debt. Such violation was cured upon the initial filing.
The Company has active Registration Statements dated January 23, 1998 and
June 23, 1999, allowing it to offer up to $75 million of debt and/or equity
securities as of February 23, 2002 at terms determined by market conditions at
the time of sale.
During fiscal 2001, the Company sold 9 properties and simultaneously
leased them back from the purchaser. Net proceeds received by the Company
related to these transactions amounted to approximately $65 million. The Company
expects to enter into similar transactions with other owned properties from time
to time in the future.
During fiscal 2001, the Company funded its capital expenditures and debt
repayments through internally generated funds combined with proceeds from
disposals of property, revolving lines of credit and the issuance of $275
million 9 1/8% Senior Notes due 2011. Capital expenditures totaled $246 million
during fiscal 2001, which included 21 new supermarkets, 26 major remodels or
enlargements and capital expenditures related to the business process
initiative.
21
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
For fiscal 2002, the Company has planned capital expenditures of
approximately $300 million. These expenditures relate primarily to opening 25
new supermarkets, enlarging or remodeling 70 - 75 supermarkets, and capital
purchases associated with the Company's business process initiative. The Company
currently expects to close a total of approximately 15 - 20 stores in fiscal
2002.
The Company does not expect to pay dividends during fiscal 2002.
As of February 23, 2002, the Company had the following material
contractual obligations and commitments:
Payments Due by Period (in millions)
-----------------------------------------------------------------------------------
Contractual Fiscal 2003 Fiscal 2005
Obligations Total Fiscal 2002 and 2004 and 2006 Thereafter
---------------------- ---------- ----------- ---------- ---------- ----------
Debt $ 781.5 $ 0.5 $ 23.3 $ 0.2 $ 757.5
Capital Leases 213.5 22.3 38.7 27.6 124.9
Operating Leases 3,350.8 249.0 471.0 434.5 2,196.3
Technology-Related 36.1 28.9 7.2 - -
Purchase Commitments 57.6 30.4 27.2 - -
Interest on Debt 1,080.1 67.4 133.1 131.3 748.3
---------- --------- --------- --------- ----------
Total $ 5,519.6 $ 398.5 $ 700.5 $ 593.6 $ 3,827.0
========== ========= ========= ========= ==========
Expiration of Commitments (in millions)
-----------------------------------------------------------------------------------
Other Fiscal 2003 Fiscal 2005
Commitments Total Fiscal 2002 and 2004 and 2006 Thereafter
---------------------- ---------- ----------- ---------- --------- ----------
Guarantees $ 2.5 $ 0.2 $ 0.7 $ 0.8 $ 0.8
========== ========= ========= ========= ==========
The Company is the guarantor of a debt commitment of $2.5 million which
will expire in 2011.
The Company has product supply agreements that require it to make
purchases totaling $58 million as of February 23, 2002.
The Company's existing senior debt rating was B2 with negative
implications with Moody's Investors Service and BB with negative implications
with Standard & Poor's Ratings Group as of February 23, 2002. On August 5, 2002,
Moody's announced that the Company's credit rating was under review for possible
downgrade. Future rating changes could affect the availability and cost of
financing to the Company.
The Company believes that its current cash resources, including the funds
available under the Secured Credit Agreement, together with cash generated from
operations, will be sufficient for the Company's capital expenditure programs
and mandatory scheduled debt repayments throughout fiscal 2002. However, certain
external factors such as unfavorable economic conditions, competition, labor
relations, and fuel and utility costs could have a significant impact on cash
generated from operations.
22
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
MARKET RISK
- -----------
Market risk represents the risk of loss from adverse market changes that
may impact the consolidated financial position, results of operations or cash
flows of the Company. Among other possible market risks, the Company is exposed
to such risk in the areas of interest rates and foreign currency exchange rates.
From time to time, the Company may enter hedging agreements in order to
manage risks incurred in the normal course of business including the managing of
interest expense and exposure to fluctuations in foreign exchange rates. These
agreements may include interest rate swaps, locks, caps, floors and collars as
well as the use of foreign currency swaps and forward exchange contracts.
Interest Rates
- --------------
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's debt obligations. The Company has no cash
flow exposure due to rate changes on its $777 million in notes as of February
23, 2002 because they are at fixed interest rates. However, the Company does
have cash flow exposure on its committed and uncommitted bank lines of credit
due to its variable LIBOR pricing. Accordingly, during fiscal 2001, a presumed
1% change in LIBOR would have impacted interest expense by $1 million.
On January 4, 2002, the Company entered into an interest rate hedging
agreement with a commercial bank with a notional amount of $50 million maturing
on April 15, 2007. This hedging agreement was designated as a fair value hedging
instrument and effectively converts a portion of the Company's 7.75% Notes due
April 15, 2007 from fixed rate debt to floating rate debt. There were no
ineffective changes in fair value of this hedging agreement. At February 23,
2002, this hedging agreement had a fair value of $1 million. A presumed 1%
change in LIBOR during the time the hedging agreements was outstanding during
fiscal 2001 would not have had a material impact on borrowing costs.
On April 25, 2002 and April 26, 2002, the Company entered into additional
interest rate hedging agreements with notional amounts totaling $100 million
maturing on April 15, 2007. These hedging agreements were designated as fair
value hedging instruments and effectively convert an additional portion of the
Company's 7.75% Notes due April 15, 2007 from fixed rate debt to floating rate
debt. There were no ineffective changes in fair value of these hedging
agreements.
Foreign Exchange Risk
- ---------------------
The Company is exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. During fiscal 2001, a change in the
Canadian currency of 10% would have resulted in a fluctuation in net income of
$2 million. The Company does not believe that a change in the Canadian currency
of 10% will have a material effect on its financial position or cash flows.
23
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Critical accounting policies are those accounting policies that
Management believes are important to the portrayal of the Company's financial
condition and results and require Management's most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain.
The preparation of financial statements in conformity with 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.
Self-Insurance Reserves
- ------------------------------
The Consolidated Balance Sheets include liabilities with respect to
self-insured workers' compensation and general liability claims. The Company
estimates the required liability of such claims on a discounted basis, utilizing
an actuarial method which is based upon various assumptions which include, but
are not limited to, the Company's historical loss experience, projected loss
development factors, actual payroll, and other data. The total current and
non-current liability for self-insurance reserves recorded at February 23, 2002
is $90 million. The discount rate used at February 23, 2002 is 4.27% and is
based on the 5 year treasury bond rate. A 1% increase in the discount rate would
decrease the required liability by $2.2 million. Conversely, a 1% decrease in
the discount rate would increase the required liability by $2.4 million. The
required liability is also subject to adjustment in the future based upon the
changes in claims experience, including changes in the number of incidents
(frequency) and changes in the ultimate cost per incident (severity).
Long-Lived Assets
- -----------------------
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. If such review
indicates an impairment exists, the Company measures such impairment on a
discounted basis.
Closed Store Reserves
- --------------------------
For stores closed that are under long-term leases, the Company records a
liability for the future minimum lease payments and related costs, such as
utilities and taxes, from the date of closure to the end of the remaining lease
term, net of estimated probable cost recoveries from sublease rentals. If
estimated cost recoveries exceed the liability for future minimum lease
payments, the excess is recognized as income over the term of the sublease. The
Company estimates future net cash flows based on its experience and knowledge of
the market in which the closed store is located. However, these estimates
project net cash flow several years into the future and are affected by variable
factors such as inflation, real estate markets and economic conditions. While
these factors have been relatively stable in recent years, variation in these
factors could cause changes to the Company's estimates. As of February 23, 2002,
the Company has total store closing reserves of $166 million, which relates to
105 closed stores and 43 sub-leased stores. Of this amount, $23 million relates
to stores closed in the normal course of business and $143 million relates to
stores closed as part of the Asset Disposition Initiative (see Note 3 to the
Consolidated Financial Statements for further discussion of the Asset
Disposition Initiative).
Net Operating Loss Carryforwards
- --------------------------------
The Company has net operating loss carryforwards from its Canadian and
U.S. operations. The Canadian portion of the net operating loss carryforwards
will expire between February 2003 and February 2009 and the U.S. portion will
expire between February 2019 and February 2022. The Company has assessed its
ability to utilize the net operating loss carryforwards and concluded that no
valuation allowance currently is required since the Company believes 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 they can be utilized by the Company to reduce
its income tax obligations.
24
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 142, "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. Amortization
expense for fiscal years 2001, 2000 and 1999 was $1.4 million, $1.5 million and
$1.2 million, respectively. Additionally, 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. Although the Company intends to complete its assessment of the impact
that this statement will have on its financial statements during the second
quarter of fiscal 2002, it currently does not expect that the adoption of this
statement will result in an impairment charge.
In June 2001, the FASB issued SFAS 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. The Company is required to adopt the
provisions of SFAS No. 143 at the beginning of fiscal 2003. The Company has
determined that the adoption of this statement will not have a material impact
on its financial position or results of operations.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". 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.
There was no immediate impact on the financial statements upon adoption of SFAS
144. However, certain future store closings or asset disposals may result in
classification as discontinued operations.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections". SFAS
145 rescinds the provisions of SFAS 4 that requires companies to classify
certain gains and losses from debt extinguishments as extraordinary items,
eliminates the provisions of SFAS 44 regarding transition to the Motor Carrier
Act of 1980 and amends the provisions of SFAS 13 to require that certain lease
modifications be treated as sale leaseback transactions. The provisions of SFAS
145 related to classification of debt extinguishment are effective for fiscal
years beginning after May 15, 2002. The provisions of SFAS 145 related to lease
modification are effective for transactions occurring after May 15, 2002. The
Company is currently assessing the impact this statement will have on its
financial statements.
In July 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS
No. 146 will supersede Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires that costs associated with an exit or disposal plan be recognized when
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company is currently assessing the impact
this statement will have on its financial statements.
25
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
CAUTIONARY NOTE
- ---------------
This presentation may contain forward-looking statements about the future
performance of the Company, and is based on Management's assumptions and beliefs
in light of information currently available. The Company assumes no obligation
to update this information. These forward-looking statements are subject to
uncertainties and other factors that could cause actual results to differ
materially from such statements including but not limited to: competitive
practices and pricing in the food industry generally and particularly in the
Company's principal markets; the Company's relationships with its employees; the
terms of future collective bargaining agreements; the costs and other effects of
lawsuits and administrative proceedings; the nature and extent of continued
consolidation in the food industry; changes in the financial markets which may
affect the Company's cost of capital or the ability to access capital; supply or
quality control problems with the Company's vendors; and changes in economic
conditions, which may affect the buying patterns of the Company's customers.
26
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Operations
(Dollars in thousands, except per share amounts)
Fiscal 2000 Fiscal 1999
(As Restated (As Restated
Fiscal 2001 See Note 2) See Note 2)
-------------- -------------- ---------------
Sales $ 10,973,315 $ 10,622,866 $ 10,151,334
Cost of merchandise sold (7,822,649) (7,581,090) (7,234,343)
-------------- -------------- ---------------
Gross margin 3,150,666 3,041,776 2,916,991
Store operating, general
and administrative expense (3,234,796) (2,975,746) (2,769,909)
Gain on proceeds from the
demutualization of a mutual
insurance company 60,606 - -
-------------- -------------- ---------------
(Loss) income from operations (23,524) 66,030 147,082
Interest expense (91,722) (102,488) (90,445)
Interest income 6,972 6,222 6,218
-------------- -------------- ---------------
(Loss) income before income
taxes and extraordinary item (108,274) (30,236) 62,855
Benefit from (provision for)
income taxes 43,590 10,736 (27,542)
-------------- -------------- ---------------
(Loss) income before
extraordinary item (64,684) (19,500) 35,313
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit of $5,230 (7,222) - -
-------------- -------------- ---------------
Net (loss) income $ (71,906) $ (19,500) $ 35,313
============== ============== ===============
Net (loss) income per share - basic and diluted:
(Loss) income before
extraordinary item $ (1.69) $ (0.51) $ 0.92
Extraordinary loss on early
extinguishment of debt (0.19) - -
-------------- -------------- ---------------
Net (loss) income per share - basic
and diluted $ (1.88) $ (0.51) $ 0.92
============== ============== ===============
Weighted average common shares outstanding:
Basic 38,350,616 38,347,216 38,330,379
============== ============== ===============
Diluted 38,350,616 38,347,216 38,415,420
============== ============== ===============
See Notes to Consolidated Financial Statements.
27
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 earnings equity
------------- ----------- ----------- ------------- ------------ ----------- --------------
Balance at 2/27/99
As previously reported 38,290,716 $ 38,291 $ 454,971 $ - $ (69,039) $ 413,034 $ 837,257
Adjustment to retained
earnings due to
restatement (See
Note 2) (75,207) (75,207)
------------- ----------- ----------- ------------- ------------- ----------- -------------
Balance at 2/27/99 - As
Restated - See Note 2 38,290,716 38,291 454,971 - (69,039) 337,827 762,050
Net income - As Restated
- See Note 2 35,313 35,313
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
As Restated - See Note 2 38,367,216 38,367 457,101 (441) (60,696) 357,807 792,138
Net loss - As Restated
- See Note 2 (19,500) (19,500)
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
As Restated - See Note 2 38,347,216 38,347 456,470 - (72,808) 326,802 748,811
Net loss (71,906) (71,906)
Stock options exercised 20,412 21 283 304
Comprehensive loss (4,221) (4,221)
------------- ----------- ----------- ------------- ------------- ----------- -------------
Balance at 2/23/02 38,367,628 $ 38,368 $ 456,753 $ - $ (77,029) $ 254,896 $ 672,988
============= =========== =========== ============= ============= =========== =============
Fiscal 2000 Fiscal 1999
(As Restated (As Restated
Fiscal 2001 See Note 2) See Note 2)
----------- ----------- ---------
Comprehensive (loss) income
Net (loss) income $ (71,906) $ (19,500) $ 35,313
----------- ----------- ---------
Foreign currency translation adjustment (5,089) (14,802) 6,784
Minimum pension liability adjustment (65) 2,690 1,559
Unrealized gain on securities available for sale 933 - -
----------- --------- ---------
Other comprehensive (loss) income (4,221) (12,112) 8,343
----------- ----------- ---------
Total comprehensive (loss) income $ (76,127) $ (31,612) $ 43,656
=========== =========== =========
See Notes to Consolidated Financial Statements.
28
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
February 24, 2001
February 23, 2002 (As Restated - See Note 2)
----------------- --------------------------
Assets
Current assets:
Cash and cash equivalents $ 168,620 $ 131,550
Accounts receivable, net of allowance for doubtful
accounts of $8,274 and $9,120 at February 23, 2002
and February 24, 2001, respectively 206,188 185,779
Inventories 716,083 777,380
Prepaid expenses and other current assets 121,183 103,164
------------ ------------
Total current assets 1,212,074 1,197,873
------------ ------------
Property:
Land 88,154 107,893
Buildings 303,581 359,275
Equipment and leasehold improvements 2,293,655 2,388,366
------------ ------------
Total - at cost 2,685,390 2,855,534
Less accumulated depreciation and amortization (1,053,850) (1,050,279)
------------ ------------
Property owned 1,631,540 1,805,255
Property leased under capital leases 76,800 84,758
------------ ------------
Property - net 1,708,340 1,890,013
Other assets 273,850 231,271
------------ ------------
Total assets $ 3,194,264 $ 3,319,157
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 526 $ 6,195
Current portion of obligations under capital leases 10,691 11,634
Accounts payable 547,113 566,482
Book overdrafts 127,079 108,448
Accrued salaries, wages and benefits 167,724 158,450
Accrued taxes 69,559 62,169
Other accruals 261,771 216,684
------------ ------------
Total current liabilities 1,184,463 1,130,062
------------ ------------
Long-term debt 779,440 915,321
Long-term obligations under capital leases 93,587 106,797
Other non-current liabilities 463,786 418,166
------------ ------------
Total liabilities 2,521,276 2,570,346
------------ ------------
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 - 38,367,628 and
38,347,216 shares at February 23, 2002 and
February 24, 2001, respectively 38,368 38,347
Additional paid-in capital 456,753 456,470
Accumulated other comprehensive loss (77,029) (72,808)
Retained earnings 254,896 326,802
------------ ------------
Total stockholders' equity 672,988 748,811
------------ ------------
Total liabilities and stockholders' equity $ 3,194,264 $ 3,319,157
============ ============
See Notes to Consolidated Financial Statements.
29
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Cash Flows
(Dollars in thousands)
Fiscal 2000 Fiscal 1999
(As Restated (As Restated
Fiscal 2001 See Note 2) See Note 2)
------------ ------------ ------------
Cash Flows From Operating Activities:
Net (loss) income $ (71,906) $ (19,500) $ 35,313
Adjustments to reconcile net (loss) income
to cash provided by operating activities:
Asset disposition initiative 201,067 (3,104) 14,078
Environmental charge 1,964 4,329 -
Depreciation and amortization 262,552 255,771 232,712
Deferred income tax (benefit) provision (47,298) (14,267) 22,957
Deferred income tax benefit from early
extinguishment of debt (5,230) - -
Loss (gain) on disposal of owned property and
write-down of property, net 348 4,263 (2,973)
(Increase) decrease in receivables (22,151) 40,479 (24,832)
Decrease in inventories 58,246 85 60,283
(Increase) decrease in prepaid expenses and other
current assets (39,469) 4,903 2,392
Decrease (increase) in other assets 988 (7,648) (16,630)
(Decrease) increase in accounts payable (12,446) 5,443 16,546
Increase in accrued expenses 18,027 13,104 4,797
(Decrease) increase in other accruals (17,051) (31,661) 5,878
Increase in other non-current liabilities (7,684) (882) (34,246)
Other, net 5,008 2,446 (1,615)
------------ ------------ ------------
Net cash provided by operating activities 324,965 253,761 314,660
------------ ------------ ------------
Cash Flows From Investing Activities:
Expenditures for property (246,182) (415,842) (479,572)
Unrealized gain on securities available for sale 933 - -
Proceeds from disposal of property 105,808 150,255 101,319
------------ ------------ ------------
Net cash used in investing activities (139,441) (265,587) (378,253)
------------ ------------ ------------
Cash Flows From Financing Activities:
Changes in short-term debt (5,000) (22,000) 3,900
Proceeds under revolving lines of credit 1,098,675 817,447 165,102
Payments on revolving lines of credit (1,288,282) (602,307) (235,150)
Proceeds from long-term borrowings 276,964 26,981 202,110
Payments on long-term borrowings (223,907) (166,670) (4,975)
Principal payments on capital leases (11,710) (11,252) (11,968)
Increase (decrease) in book overdrafts 18,824 (3,298) (49,354)
Deferred financing fees (13,485) (6,428) (6,298)
Proceeds from stock options exercised 304 - 1,555
Cash dividends - (11,505) (15,333)
------------ ------------ ------------
Net cash (used in) provided by financing activities (147,617) 20,968 49,589
------------ ------------ ------------
Effect of exchange rate changes on cash and
cash equivalents (837) (2,195) 1,797
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 37,070 6,947 (12,207)
Cash and cash equivalents at beginning of year 131,550 124,603 136,810
------------ ------------ ------------
Cash and cash equivalents at end of year $ 168,620 $ 131,550 $ 124,603
============ ============ ============
See Notes to Consolidated Financial Statements.
30
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 5 - Wholesale Franchise
Business, Note 6 - Indebtedness, Note 9 - Income Taxes, Note 10 - Retirement
Plans and Benefits, and Note 13 - Operating Segments. The principal stockholder
of the Company, Tengelmann Warenhandelsgesellschaft ("Tengelmann"), owned 56.6%
of the Company's common stock as of February 23, 2002.
Fiscal Year
- -----------
The Company's fiscal year ends on the last Saturday in February. Fiscal
2001 ended February 23, 2002, fiscal 2000 ended February 24, 2001 and fiscal
1999 ended February 26, 2000. Fiscal 2001, fiscal 2000 and fiscal 1999 were each
comprised of 52 weeks.
Restatement of Previously Issued Financial Statements
- -----------------------------------------------------
As discussed in Note 2 - Restatement of Previously Issued Financial
Statements, the Company has restated its financial statements for fiscal 1999,
fiscal 2000 and supplementary financial information for the first, second and
third quarters of fiscal 2001, to correct accounting errors identified in a
review by the Company of irregularities relating to the timing of vendor
allowance recognition and the accounting for certain inventory and to correct
additional accounting errors for 1) the timing of the recognition of certain
vendor allowances which were not accounted for in accordance with generally
accepted accounting principles ("GAAP"), 2) the use of a method of estimating
self-insurance reserves which did not comply with GAAP, and 3) the recognition
of sublet income associated with certain closed stores which did not comply with
GAAP.
Revenue Recognition
- -------------------
Retail revenue is recognized at point-of-sale while wholesale revenue is
recognized, in accordance with its terms, when goods are shipped. Discounts that
the Company provides to customers are accounted for as a reduction to sales.
Cash and Cash Equivalents
- -------------------------
Short-term investments that are highly liquid with an original maturity
of three months or less are deemed to be cash equivalents and are included in
"Cash and cash equivalents" on the Company's Consolidated Balance Sheets.
Inventories
- -----------
Store inventories are valued principally at the lower of cost or market
with cost determined under the retail method on a first-in, first-out basis.
Warehouse and other inventories are valued primarily at the lower of cost or
market with cost determined on a first-in, first-out basis. Inventories of
certain acquired companies are valued using the last-in, first-out method, which
was their practice prior to acquisition. See Note 4 - Inventory for additional
information regarding the Company's use of the last-in, first-out method.
Vendor Allowances
- -----------------
Vendors provide the Company with various allowances and incentives which
are similar to discounts but are not provided as a reduced price on an invoice.
Instead they are provided as separate payments to the Company or separate
credits which the Company deducts from its payments to vendors. These allowances
have underlying contractual commitments and are recognized by the Company as a
reduction to cost of merchandise sold as earned by fulfillment of the
contractual terms. These terms generally are of three types - specific
activities, product purchase or sales volume or a specific period of time.
The specific activity allowances are primarily promotional, advertising
and new product introduction contracts. When the promotion or advertising is run
or when the new product is introduced, the Company recognizes the related
allowance. Product purchase and sales volume allowances are based on either
purchases from the vendor or sale of vendor products to our customers. As the
purchase or sale allowance contract terms are met, which is generally within 2
to 3 months, the Company recognizes the related allowance credit. Period of time
contracts are often entered into for display commitments, shelf space
commitments, exclusive vendor arrangements and certain wholesale supply
commitments. These allowances are amortized evenly over the lives of the
contractual commitments, typically one to three years.
When payment is received prior to fulfillment of the terms, the amounts
are deferred and recognized as earned, according to the contractual terms as
described above.
31
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Advertising Costs
- -----------------
Advertising costs incurred to produce media advertising are expensed in
the period the advertisement is first shown. Other advertising costs, primarily
costs to produce circulars, place advertisements and pay advertising agency
fees, are expensed when incurred. The Company recorded advertising expense of
$136.0 million, $146.5 million and $138.8 million for fiscal 2001, 2000 and
1999, respectively.
Pre-opening Costs
- -----------------
Non-capital expenditures incurred in opening new stores or remodeling
existing stores are expensed as incurred.
Software Costs
- --------------
The Company capitalizes externally purchased software and amortizes it
over three to five years. Amortization expense for fiscal 2001, 2000 and 1999
was $3.3 million, $1.4 million and $0.9 million, respectively.
The Company applies 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 2001, 2000 and 1999, the Company capitalized $24.1 million, $3.7 million
and $0.9 million, respectively, of such software costs. Such software is
amortized over three to five years and for fiscal 2001, 2000 and 1999, the
Company recorded amortization expense of $2.7 million, $0.7 million and $0.5
million, respectively.
Earnings Per Share
- ------------------
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") 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 38,350,616 for fiscal 2001, 38,347,216 for fiscal 2000 and
38,330,379 for fiscal 1999. 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 2001 and 2000 would have
been 588,603 and 14,478, 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 $1.4 million for fiscal 2001, $1.5 million for fiscal
2000 and $1.2 million for fiscal 1999. The practice of recording such
amortization expense will be discontinued in Fiscal 2002 with the adoption of
SFAS 142 (see "New Accounting Pronouncements Not Yet Adopted "). The book value
of excess of cost over net assets acquired at February 23, 2002 and February 24,
2001 was $32.0 million and $34.2 million, net of accumulated amortization of
$14.0 million and $12.5 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 23, 2002, 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.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with GAAP 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.
Self Insurance Reserves
-----------------------
The Consolidated Balance Sheets include liabilities with respect to
self-insured workers' compensation and general liability claims. The
current portion of these liabilities is included in other accruals and
the non-current portion is included in other non-current liabilities.
The Company estimates the required liability of such claims on a
discounted basis, utilizing an actuarial method which is based upon
various assumptions which include, but are not limited to, the
Company's historical loss experience, projected loss development
factors, actual payroll, and other data. The required liability is also
subject to adjustment in the future based upon the changes in claims
experience, including changes in the number of incidents (frequency)
and change in the ultimate cost per incident (severity).
32
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
Closed Store Reserves
---------------------
For stores closed that are under long-term leases, the Company records
a liability for future minimum lease payments and related costs,
such as utilities and taxes, from the date of closure to the end of the
remaining lease term, net of estimated probable cost recoveries from
sublease rentals. If estimated cost recoveries exceed our liability for
future minimum lease payments, the excess is recognized as income over
the term of the sublease. The Company estimates net future cash flows
based on its experience and knowledge of the market in which the closed
store is located. However, these estimates project net cash flow
several years into the future and are affected by variable factors such
as inflation, real estate markets and economic conditions. While these
factors have been relatively stable in recent years, variation in these
factors could cause changes to the Company's estimates.
Valuation Allowance for Deferred Tax Asset
------------------------------------------------------
The Company has net operating loss carryforwards from its Canadian and
U.S. operations. The Canadian portion of the net operating loss
carryforwards will expire between February 2003 and February 2009 and
the U.S. portion will expire between February 2019 and February 2022.
The Company has assessed its ability to utilize the net operating loss
carryforwards and concluded that no valuation allowance currently is
required since the Company believes 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 they can be utilized by
the Company to reduce its income tax obligations.
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. If such review
indicates an impairment exists, the Company measures such an impairment on a
discounted basis.
The Company recorded impairment losses during the years ended February
23, 2002 and February 24, 2001 related to the sale leaseback transactions (see
Note 14 - Sale-Leaseback Transactions for further details) and during the year
ended February 23, 2002 related to its asset disposition initiative (see Note 3
- - Asset Disposition Initiative 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 2001, 2000 and 1999, the Company disposed of
and/or wrote down certain assets which resulted in a pretax net loss of $0.3
million, a pretax net loss of $4.3 million and a pretax net gain of $3.0
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" on the Company's Consolidated
Balance Sheets.
33
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The Company accrues for vacation pay. Liabilities for compensated
absences of $81.5 million and $81.7 million at February 23, 2002 and February
24, 2001, respectively, are included in "Accrued salaries, wages and benefits"
on the Company's Consolidated Balance Sheets.
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 (Loss) Income
- ---------------------------
The Company has other comprehensive (loss) income relating to foreign
currency translation adjustment, minimum pension liability adjustment and an
unrealized gain on securities available for sale.
Accumulated other comprehensive loss as of February 23, 2002 included
foreign currency translation of $77.8 million and an additional minimum pension
liability of $0.1 million partially offset by an unrealized gain on securities
available for sale of $0.9 million. Accumulated other comprehensive loss as of
February 24, 2001 included foreign currency translation of $72.7 million and an
additional minimum pension liability of less than $0.1 million.
Translation of Canadian Currency
- --------------------------------
Assets and liabilities denominated in Canadian currency are translated at
year-end rates of exchange, and revenues and expenses are translated at average
rates of exchange during the year. Gains and losses resulting from translation
adjustments are accumulated as a separate component of accumulated other
comprehensive loss within stockholders' equity.
34
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
New Accounting Pronouncements Not Yet Adopted
- ---------------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 142, "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. Amortization expense for fiscal years 2001, 2000 and 1999
was $1.4 million, $1.5 million and $1.2 million, respectively. Additionally,
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. Although the Company intends to complete
its assessment of the impact that this statement will have on its financial
statements during the second quarter of fiscal 2002, it currently does not
expect that the adoption of this statement will result in an impairment charge.
In June 2001, the FASB issued SFAS 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. The Company is required to adopt the
provisions of SFAS 143 at the beginning of fiscal 2003. The Company has
determined that the adoption of this statement will not have a material impact
on its financial position or results of operations.
35
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". 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.
There was no immediate impact on the financial statements upon adoption of
SFAS 144. However, certain future store closings or asset disposals may result
in classification as discontinued operations.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements 4
44 and 64, Amendment of FASB Statement 13, and Technical Corrections". SFAS 145
rescinds the provisions of SFAS 4 that requires companies to classify certain
gains and losses from debt extinguishments as extraordinary items, eliminates
the provisions of SFAS 44 regarding transition to the Motor Carrier Act of 1980
and amends the provisions of SFAS 13 to require that certain lease modifications
be treated as sale leaseback transactions. The provisions of SFAS 145 related to
classification of debt extinguishment are effective for fiscal years beginning
after May 15, 2002. The provisions of SFAS 145 related to lease modifications
are effective for transactions occurring after May 15, 2002. The Company is
currently assessing the impact this statement will have on its financial
statements.
In July 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS
No. 146 will supersede Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires that costs associated with an exit or disposal plan be recognized when
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company is currently assessing the impact
this statement will have on its financial statements.
Note 2 - Restatement of Previously Issued Financial Statements
Prior to filing its 2001 Annual Report on Form 10-K, the Company
discovered certain irregularities relating to the timing for the recognition of
vendor allowances and the accounting for certain inventory. As the Company
announced on May 24, 2002, it promptly commenced a review of these issues. This
review caused the Company to delay filing its Annual Report on Form 10-K. As a
result of the accounting errors discovered during this review, the Company has
restated its financial statements for fiscal 1999 and fiscal 2000, and
supplementary unaudited financial information for the first, second and third
quarters of fiscal 2001. In addition, the Company has determined that its
financial statements should also be restated to correct other accounting errors
for 1) the timing of the recognition of certain other vendor allowances which
were not accounted for in accordance with GAAP, 2) the use of a method of
estimating self-insurance reserves which did not comply with GAAP, and 3) the
recognition of sublet income associated with certain closed stores, which did
not comply with GAAP. The summary of the effects of restatement are presented in
the tables below entitled "Overall Impact of Restatement".
36
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Overall Impact of the Restatement
- ---------------------------------
The schedules below show the effects of the restatement on reported
earnings for each of the years presented. The restatement has the aggregate
effect of decreasing retained earnings by $75 million as of February 27, 1999.
This amount had previously been reported as net income in years prior to fiscal
1999 using accounting methods that did not conform with GAAP. In general, the
Company's prior methodologies understated its reported earnings in the most
recent three fiscal years. This resulted from errors in accounting from reduced
recognition of vendor allowance credits and increased recognition of
self-insurance claims expense in order to reduce the balance sheet underaccruals
for these matters. The impact on retained earnings as of February 27, 1999 and
net income for fiscal 1999 and fiscal 2000 is detailed in the table below. The
Company has restated its financial statements to properly present its results of
operations and financial condition in accordance with GAAP. Additionally, the
disclosures regarding the restatement in this Note have been expanded.
Before Tax (a)
- --------------
Earnings Impact on
Increase (Decrease) retained
------------------- earnings
Fiscal Fiscal --------
2000 1999 Feb. 27, 1999
---- ---- -------------
(Dollars In Millions)
Vendor allowances
Irregularities (3.5) (4.2) -
Non-GAAP policy 17.3 13.9 (55.5)
Perishable inventory irregularity (0.4) (0.3) -
Self-insurance reserves (1.3) 26.6 (48.1)
Closed store subleases (2.7) (0.1) (23.9)
----- ----- ------
Pre-tax impact of restatement 9.4 35.9 (127.5)
(Provision for) benefit from
income taxes (3.8) (14.7) 52.3
----- ------ -----
Total impact of restatement 5.6 21.2 (75.2)
==== ===== ======
(a) Changes to vendor allowances and perishable inventory irregularities
impact the cost of merchandise sold line on the Statements of Consolidated
Operations. Changes to closed store subleases impact the selling, general
and administrative expense line on the Statements of Consolidated
Operations. Changes to self-insurance reserves impact both the selling,
general and administrative expense and interest expense lines on the
Statements of Consolidated Operations as follows:
Earnings
Increase (Decrease)
-------------------
Fiscal Fiscal
2000 1999
---- ----
Selling, general and
administrative expense 5.1 33.0
Interest expense (6.4) (6.4)
37
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Effect on Net Income
- --------------------
Impact
Net Earnings on
increase (decrease) retained
------------------- earnings
Fiscal Fiscal ---------
2000 1999 Feb. 27, 1999
(In Millions) ----- ----- -------------
Vendor allowances
Irregularities (2.1) (2.5) -
Non-GAAP policy 10.2 8.2 (32.7)
Perishable inventory irregularity (0.2) (0.2) -
Self-insurance reserves (0.8) 15.7 (28.4)
Closed store subleases (1.5) - (14.1)
---- ----- -----
Total impact of restatement 5.6 21.2 (75.2)
==== ===== =====
Irregularities
- --------------
As referred to above, the Company discovered certain irregularities with
respect to accounting for vendor allowances and perishable inventory. The
resultant review identified that certain employees circumvented the Company's
system of internal controls resulting in accounting errors. With respect to
vendor allowances, those errors caused valid allowances generally to be
recognized before they were earned. With respect to perishable inventories, the
irregularities related to overstatement of inventory due to inappropriate
adjustments made to physical counts, causing errors in the periods presented in
the tables above. Correction of the vendor allowances errors has resulted in a
deferral of $12.1 million as of February 23, 2002 of allowances as part of the
balance discussed in the "Vendor Allowances" caption below. The Company has
modified certain procedures and is in the process of implementing additional
procedural changes designed to prevent such irregularities in the future.
Vendor Allowances
- -----------------
Prior to fiscal 1997, the Company recognized vendor allowances for
certain one-year and multi-year allowance contracts as cash was received since
the Company believed that such amounts received were non-refundable and that no
future performance was required. In fiscal 1997, the Company implemented a new
accounting policy whereby the amount of allowances recognized was limited to the
amount of such allowances recognized in the prior year. Allowances in excess of
such limit were deferred and were not amortized. Neither policy was in
conformity with GAAP. The Company's methods resulted in the overstatement of its
reported earnings in the aggregate prior to fiscal 1997. Furthermore, the policy
implemented in fiscal 1997 had the effect of reducing its reported earnings in
subsequent periods as the Company limited its recognition of these allowances in
order to increase its accrual for unearned allowances. Also, the volume of these
transactions have been decreasing in recent years, further causing the
allowances recognized in recent years to be less than they would have been if
these contracts had previously been deferred and recognized over their term in
accordance with GAAP. On an aggregate basis, earnings were overstated by $55.5
million pre-tax ($32.7 million after tax) prior to February 27, 1999. The
Company's financial statements have been restated to correct this accounting
error in order to recognize the allowances as they are earned over the lives of
the contracts. The Company has deferred vendor allowances aggregating $64
million as of February 23, 2002 which are expected to be recognized as
reductions to cost of merchandise sold generally through fiscal 2004. See
"Overall Impact of Restatement" above for the amount of such restatement.
Self-Insurance Reserves
- -----------------------
The Company's business results in significant risks that the Company
self-insures. These risks relate primarily to customer and employee accidents.
The Company estimates and records the present value of the expected self-insured
portion of the cost of such accidents and related liability matters as
self-insurance reserves. The Company's previous method of establishing its
self-insurance reserves was not appropriate because it did not adequately
consider its historical loss experience resulting from the frequency (number of
incidents) and severity (ultimate cost) of claims. It also improperly included
adjustments to reduce the reserve in anticipation of future improvement in
expected loss experience resulting from planned risk management changes intended
to reduce the frequency and severity of future claims. This method was not in
conformity with GAAP. Accordingly, the Company has restated its financial
statements to correct this accounting error by reflecting its self-insurance
reserves on the basis of actuarially determined estimates. The Company's prior
method resulted in overstatement of its reported earnings in the aggregate prior
to fiscal 1997. In recent years the Company had generally reduced its reported
earnings as it accrued these costs at rates in excess of its actual development
of the underlying claims. The Company's restated self-insurance reserves are
$90.0 million, $100.0 million and $97.5 million at the end of fiscal 2001, 2000
and 1999 respectively. The reserve is impacted by and was determined as of each
report date based upon the Company's infomation regarding frequency and
severity, among other factors, which was available at each report date. The
Company's frequency decreased approximately 10% from fiscal 1999 through fiscal
2001; severity was relatively unchanged during this period. These reserves
represent the present value of the estimated self-insured portion of claims,
including claims incurred but not reported. Such claims generally are expected
to be paid within five years, although payments on some employee accident claims
extend beyond this period. See "Overall Impact of Restatement" above for the
amount of such restatement.
38
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Closed Store Subleases
- ----------------------
In the normal course of business, the Company closes stores periodically.
For stores closed that are under long-term leases, the Company records a
liability for the future minimum lease payments and related costs, such as
utilities and taxes, from the date of closure to the end of the remaining lease
term, net of estimated probable cost recoveries from sublease rentals. In some
cases, the Company subleases the stores for amounts in excess of its own related
costs under its lease. Under the Company's prior accounting method, such excess
of sublease amounts were recorded as an offset to the cost of closure of other
locations. Such a methodology was not in conformity with GAAP. Accordingly, the
Company has restated its financial statements to correct this accounting error
by recognizing those sublease excesses ratably as income over the term of the
sublease. The Company's prior accounting method had the effect of overstating
reported earnings in the period in which a sublease was entered into, by the
amount that total sublease rental exceeded the lease obligations, and decreasing
reported earnings in the subsequent periods in which the excess should have been
recognized. Excess sublease amounts expected to be recognized in future periods
approximate $5 million for fiscal 2002 and amortizes at decreasing amounts over
a period of several years. See "Overall Impact of Restatement" above for the
amount of such restatements. The Company's prior methodology had no effect on
stores closed as part of the Asset Disposition Initiative discussed in Note 3 of
the Company's Consolidated Financial Statements.
39
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The following is a summary of the significant effects of the restatement
on the Company's financial statements for fiscal years 2000 and 1999:
As
Previously As
Dollars in thousands Reported Adjustments Restated
---------------- --------------- ----------------
Fiscal 2000
- -----------
Statement of Consolidated Operations
- ------------------------------------
Cost of merchandise sold $ (7,594,450) $ 13,360 $ (7,581,090)
Gross margin 3,028,416 13,360 3,041,776
Store operating, general and administrative expense (2,978,223) 2,477 (2,975,746)
Income from operations 50,193 15,837 66,030
Interest expense (96,088) (6,400) (102,488)
(Loss) income before income taxes (39,673) 9,437 (30,236)
Benefit from (provision for) income taxes 14,605 (3,869) 10,736
Net (loss) income (25,068) 5,568 (19,500)
Net (loss) income - basic and diluted $ (0.65) $ 0.14 $ (0.51)
Consolidated Balance Sheets
- ---------------------------
Accounts receivable $ 183,382 $ 2,397 $ 185,779
Inventories 783,758 (6,378) 777,380
Total current assets 1,201,854 (3,981) 1,197,873
Other assets 217,936 13,335 231,271
Total assets 3,309,803 9,354 3,319,157
Other accruals 194,106 22,578 216,684
Total current liabilities 1,107,484 22,578 1,130,062
Other non-current liabilities 382,904 35,262 418,166
Total liabilities 2,512,506 57,840 2,570,346
Retained earnings 375,288 (48,486) 326,802
Total stockholders' equity 797,297 (48,486) 748,811
Total liabilities and stockholders' equity 3,309,803 9,354 3,319,157
Fiscal 1999
- -----------
Statement of Consolidated Operations
- ------------------------------------
Cost of merchandise sold $ (7,243,718) $ 9,375 $ (7,234,343)
Gross margin 2,907,616 9,375 2,916,991
Store operating, general and administrative expense (2,802,786) 32,877 (2,769,909)
Income from operations 104,830 42,252 147,082
Interest expense (84,045) (6,400) (90,445)
Income before income taxes 27,003 35,852 62,855
Provision for income taxes (12,843) (14,699) (27,542)
Net income 14,160 21,153 35,313
Net income - basic and diluted $ 0.37 $ 0.55 $ 0.92
Retained Earnings - February 27, 1999 413,034 (75,207) 337,827
In addition to the above tables, see Note 18 - Summary of Quarterly
Results for the effect of the restatement on the supplementary financial
information for fiscal 2000 and 2001 quarters.
40
Note 3 - Asset Disposition Initiative
In May 1998, the Company initiated an assessment of its business
operations in order to identify the factors that were impacting the performance
of the Company. As a result of this assessment, in fiscal 1998 and 1999, the
Company announced a plan to close two warehouse facilities and a coffee plant in
the U.S., a bakery plant in Canada and 166 stores including the exit of the
Richmond, Virginia and Atlanta, Georgia markets.
As of February 23, 2002, the Company had closed all stores and facilities
related to this phase of the initiative. The Company paid $29 million of the
total net severance charges from the time of the original charges through
February 23, 2002, which resulted from the termination of approximately 3,400
employees. The remaining severance liability primarily relates to future
obligations for early withdrawals from multi-employer union pension plans.
The following table summarizes the activity related to the aforementioned
charges over the last three fiscal years:
41
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Severance
Store Fixed and Facilities
Occupancy Assets Benefits Occupancy Total
----------- ---------- ---------- --------- -----------
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
Addition (1) 3,818 - - - 3,818
Utilization (4) (23,302) - (544) - (23,846)
Adjustment - - - - -
----------- ---------- ---------- --------- -----------
Reserve Balance at
Feb. 23, 2002 $ 63,377 $ - $ 2,177 $ - $ 65,554
=========== ========== ========== ========= ===========
(1) The additions to store occupancy of $5.1 million and $3.8 million during
fiscal 2000 and 2001 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 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 original charge. 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. Additionally, in fiscal 2000, the
Company recorded a net reduction in "Store operating, general and
administrative expense" of $3.1 million to further reverse a portion of the
charge. This reversal is primarily a result of a change in estimate
resulting from the sale of one of the Company's warehouses sold during the
first quarter of fiscal 2000.
(3) Store occupancy utilization for fiscal 1999 is comprised of $29.6 million of
lease and other occupancy payments for the period, net of $25.0 million of
net proceeds on the assignment of leases which was considered in determining
the original charge recorded during fiscal 1998.
(4) Store occupancy utilization of $25.7 million and facilities occupancy of
$0.5 million for fiscal 2000 and store occupancy utilization of $23.3
million for fiscal 2001 represent lease and other occupancy payments made
during those periods.
42
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
At February 23, 2002, approximately $9.9 million of the reserve was
included in "Other accruals" and the remaining amount was included in "Other
non-current liabilities" on the Company's Consolidated Balance Sheets.
Included in the Statements of Consolidated Operations are the operating
results of the 166 underperforming stores which the Company has exited. The
operating results of these stores are as follows:
Fiscal 2001 Fiscal 2000 Fiscal 1999
----------- ----------- -----------
Sales $ 197 $ 678 $200,208
======== ======= ========
Operating loss $ (108) $ (139) $(30,572)
======== ======= ========
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from Management's review of the performance and
potential of each of the Company's businesses and individual stores. At the
conclusion of this review, the Company determined that certain underperforming
operations, including 39 stores (30 in the United States and 9 in Canada) and 3
warehouses should be closed and/or sold, and certain administrative streamlining
should take place. As a result of these decisions, the Company announced on
November 14, 2001 that it would incur costs of approximately $200 - $215 million
pretax ($115 - $125 million after tax) through the third quarter of fiscal 2002.
Of this amount, $193.5 million pretax ($112.3 million after tax) was included in
the Statements of Consolidated Operations for fiscal 2001. The components of
this net pretax charge were as follows:
o $180.3 million of costs to close the stores and warehouses and perform
certain administrative streamlining, of which $63.5 million related to the
present value of future occupancy obligations, $85.0 million related to the
write-down of fixed assets, $24.3 million related to severance for store and
administrative personnel and $7.5 million related to other miscellaneous
items;
o $20.8 million of costs to discontinue development of 4 potential stores of
which $16.9 million related to the present value of future occupancy
obligations, $3.5 million related to fixed asset write-offs and $0.4 million
related to occupancy costs incurred in the current period; and
o $7.6 million in gains on the sale of other properties and equipment,
primarily land and buildings.
Of this net pretax charge, $3.9 million was included in "Cost of
merchandise sold" and $189.6 million was included in "Store operating, general
and administrative expense" in the Statements of Consolidated Operations for
fiscal 2001.
43
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
To the extent fixed assets included in the items noted above could be
used in other continuing operations, the Company will transfer those assets as
needed. Fixed assets that the Company cannot transfer to other operations will
be scrapped. Accordingly, the write-down recorded during fiscal 2001 was based
on expected transfers.
Included in the $193.5 million net charges recorded during fiscal 2001,
there were, and will continue to be, other charges related to the plan which
could not be accrued at February 23, 2002 because they did not meet the criteria
for accrual under EITF 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit Activity (Including Certain Costs
Incurred in a Restructuring)". Such costs have been, and will continue to be,
expensed as incurred while the asset disposition is being executed. During
fiscal 2001, these costs amounted to $8.7 million, which were primarily related
to non-accruable closing costs and inventory markdowns. These costs are excluded
from the table on the following page which represents only the reserve recorded
on the balance sheet. Also included in the $193.5 million net charges was a
reversal of previously accrued severance and benefits of $0.6 million related to
a reduction in the severance payments required to be made to certain store
employees in Canada in accordance with Ontario provincial law.
The following table summarizes the activity related to the aforementioned
reserve recorded on the Consolidated Balance Sheets since the announcement of
the charge in November 2001:
Severance
and Goodwill/
Occupancy Benefits Fixed Assets Total
--------- ----------- ------------ ----------
Original Charge $ 80,456 $ 23,435 $ 81,519 $ 185,410
Addition (1) 1,673 - - 1,673
Utilization (2) (1,806) (2,891) (81,519) (86,216)
Adjustment (3) - (584) - (584)
--------- --------- --------- ----------
Reserve Balance at
February 23, 2002 $ 80,323 $ 19,960 $ - $ 100,283
========= ========= ========= ==========
(1) The addition to occupancy of $1.7 million represents the present value of
accrued interest related to lease obligations.
(2) Occupancy utilization of $1.8 million represents vacancy related payments
for closed locations. Severance utilization of $2.9 million represents
payments made to terminated employees during the period. Goodwill/fixed
asset utilization of $81.5 million represents the write-off of fixed assets
of the operations to be discontinued and the write-off of goodwill related
to the Barn warehouse in Canada that was deemed to be impaired.
(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, the Company recorded an
adjustment to severance and benefits of $0.6 million related to a reduction
in the severance payments required to be made to certain store employees in
Canada. Under Ontario provincial law, employees to be terminated as part of
a mass termination are entitled to receive compensation, either worked or
paid as severance, for a set period of time after the official notice date.
Since such closures took place later than originally expected, less time
remained in the aforementioned guarantee period.
44
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
As of February 23, 2002, the Company paid approximately $2.9 million of
the total severance charge recorded which resulted from the termination of
approximately 850 employees. The remaining individual severance payments will be
paid by the end of fiscal 2003.
At February 23, 2002, approximately $34.4 million of the reserve was
included in "Other accruals" and the remaining amount was included in "Other
non-current liabilities" on the Company's Consolidated Balance Sheets.
Included in the Statements of Consolidated Operations for fiscal 2001,
2000 and 1999 are the sales and operating results of the 39 stores that were
identified for closure as part of this asset disposition. The results of these
operations are as follows:
Fiscal 2001 Fiscal 2000 Fiscal 1999
----------- ----------- -----------
Sales $266,802 $319,812 $253,670
======== ======== ========
Operating loss $(24,376) $(24,332) $(10,802)
======== ======== ========
Based upon current available information, Management evaluated the
reserve balances as of February 23, 2002 of $65.6 for the 1998 phase of the
asset disposition initiative and $100.3 million for the 2001 phase of the asset
disposition initiative and has concluded that they are adequate. The Company
will continue to monitor the status of the vacant properties and adjustments to
the reserve balances may be recorded in the future, if necessary.
Note 4 - Inventory
Approximately 12% of the Company's inventories are valued using the
last-in, first-out ("LIFO") method at both February 23, 2002 and February 24,
2001. Such inventories would have been $18.6 million and $18.1 million higher at
February 23, 2002 and February 24, 2001, respectively, if the retail and
first-in, first-out methods were used. The Company recorded a LIFO charge of
$0.5 million in fiscal 2001 and $0.9 million in fiscal 1999 as compared to a
LIFO credit of $1.5 million in fiscal 2000. Liquidation of LIFO layers in the
periods reported did not have a significant effect on the results of operations.
45
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Note 5 - Wholesale Franchise Business
The Company serviced 67 franchised stores as of February 23, 2002 and 68
franchised stores as of February 24, 2001. These franchised stores, all of which
are located in Canada, are required to purchase inventory exclusively from the
Company which acts as a wholesaler to the franchisees. During fiscal 2001, 2000
and 1999, the Company had wholesale sales to these franchised stores of $677
million, $631 million and $523 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 $2.8 million and $3.7 million, were included in "Accounts
receivable" on the Company's Consolidated Balance Sheets at February 23, 2002
and February 24, 2001, respectively. The long-term portion of the inventory
notes and equipment leases, net of allowance for doubtful accounts, amounting to
approximately $44.8 million and $55.3 million, were included in "Other assets"
on the Company's Consolidated Balance Sheets at February 23, 2002 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.
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
2002 $ 5,981
2003 9,175
2004 8,343
2005 8,984
2006 8,505
2007 and thereafter 24,570
-----------
65,558
Less interest portion (17,992)
-----------
Due from franchise business $ 47,566
===========
46
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
For fiscal 2001, 2000 and 1999, approximately $1 million, $15 million and
$18 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 6 - Indebtedness
Debt consists of the following:
February 23, February 24,
2002 2001
--------------- ----------------
9.375% Notes, due August 1, 2039 $ 200,000 $ 200,000
9.125% Senior Notes, due December 15, 2011 275,000 -
7.75% Notes, due April 15, 2007 280,000 300,000
7.70% Senior Notes, due January 15, 2004 22,100 200,000
Fair value adjustment of hedged debt 992 -
Mortgages and Other Notes, due 2002 through 2018
(average interest rates at year end of 7.62% and
8.38%, respectively) 3,387 28,658
U.S. Bank Borrowings - 194,607
Less unamortized discount on 7.75% Notes (1,513) (1,749)
----------- -----------
779,966 921,516
Less current portion (526) (6,195)
----------- -----------
Long-term debt $ 779,440 $ 915,321
=========== ===========
On December 14, 2001, the Company issued $275 million 91/8% Senior Notes
due December 15, 2011. These notes pay interest semi-annually on June 15 and
December 15 and are callable beginning December 15, 2006. The Company used the
proceeds from the issuance of these notes to repay approximately $178 million of
the total $200 million 7.70% Senior Notes due January 15, 2004 and for general
corporate purposes including repayment of borrowings under the Company's secured
revolving credit agreement. The repayment of approximately $178 million of the
7.70% Senior Notes due January 15, 2004 took place in the form of a tender offer
whereby the Company paid a 6.25% premium to par. In addition, the Company
repurchased in the open market $20 million of its 7.75% Notes due April 15,
2007. The net cost of this tender and open market repurchase resulted in an
extraordinary loss due to the early extinguishment of debt of $7.2 million after
tax ($12.5 million pretax). The Company has the right to make additional
repurchases and intends to do so from time to time in the future.
From time to time, the Company may enter hedging agreements in order to
manage risks incurred in the normal course of business including the managing of
interest expense and exposure to fluctuations in foreign exchange rates. These
agreements may include interest rate swaps, locks, caps, floors and collars as
well as the use of foreign currency swaps and forward exchange contracts.
47
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
On January 4, 2002, the Company entered into an interest rate hedging
agreement with a commercial bank with a notional amount of $50 million maturing
on April 15, 2007. This hedging agreement was designated as a fair value hedging
instrument and effectively converts a portion of the Company's 7.75% Notes due
April 15, 2007 from fixed rate debt to floating rate debt. There were no
ineffective changes in fair value of this hedging agreement. For the fiscal year
ended February 23, 2002, this hedging agreement reduced borrowing costs by $0.2
million and had a fair value of $1.0 million.
On April 25, 2002 and April 26, 2002, the Company entered into additional
interest rate hedging agreements with notional amounts totaling $100 million
maturing on April 15, 2007. These hedging agreements effectively convert an
additional portion of the Company's 7.75% Notes due April 15, 2007 from fixed
rate debt to floating rate debt. There were no ineffective changes in fair value
of these hedging agreements.
The Company has a $425 million secured revolving credit agreement (the
"Secured Credit Agreement") expiring December 31, 2003, with a syndicate of
lenders, enabling it to borrow funds on a revolving basis sufficient to
refinance short-term borrowings and provide working capital as needed. This
agreement is secured primarily by inventory and company-owned real estate. The
Secured Credit Agreement was comprised of a U.S. credit agreement amounting to
$340 million and a Canadian credit agreement amounting to $85 million (C$136
million at February 23, 2002). As of February 23, 2002, the Company had no
borrowings under the Secured Credit Agreement. Accordingly, as of February 23,
2002, after reducing availability for outstanding letters of credit and
inventory requirements, the Company had $367 million available under the Secured
Credit Agreement. Borrowings under the agreement bear interest based on the
variable LIBOR pricing. On March 21, 2002 and April 23, 2002, the Company
amended the Secured Credit Agreement in order to allow for, among other things,
additional debt repayments, the ability to enter additional interest rate
hedging agreements and an increase in the amount of letters of credit available
under the agreement. In addition, $385 million of the initial $425 million of
loan commitments under the original facility scheduled to expire in December
2003 has been extended for an additional 18 months and will now expire in June
2005.
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% during
fiscal 2000.
As of February 23, 2002 the Company had no borrowings under uncommitted
lines of credit compared to borrowings of $5 million at February 24, 2001.
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. At February
23, 2002, the Company was in compliance with all of its covenants.
48
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
As a result of its delayed filing of the Annual Report on Form 10-K as
described in Note 2 of the Company's Consolidated Financial Statements, the
Company was not in compliance with its reporting covenant and therefore became
unable to draw upon the Secured Credit Agreement. On June 14, 2002 the Company
received a waiver from its lenders allowing it to borrow up to $50 million under
the Secured Credit Agreement through July 29, 2002. The initial filing of the
Company's Annual Report on Form 10-K cured said covenant violation. The filing
delay also caused a covenant violation under the indenture covering the
Company's debt. Such violation was cured upon the initial filing.
The net book value of real estate pledged as collateral for all mortgage
loans amounted to approximately $1.0 million at February 23, 2002 and $4.5
million at February 24, 2001.
The Company has active Registration Statements dated January 23, 1998 and
June 23, 1999, allowing it to offer up to $75 million of debt and equity
securities as of February 23, 2002 at terms determined by market conditions at
the time of sale.
Maturities for the next five fiscal years and thereafter are: 2002 - $0.5
million; 2003 - $1.2 million; 2004 - $22.1 million; 2005 - $0.1 million; 2006 -
$0.1 million; 2007 and thereafter - $757.5 million. Interest payments on
indebtedness were approximately $60 million for fiscal 2001, $80 million for
fiscal 2000 and $66 million for fiscal 1999.
Note 7 - Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are as
follows:
February 23, 2002 February 24, 2001
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
Interest Rate Swap $ 992 $ 992 $ - $ -
9.375% Notes, due August 1, 2039 (200,000) (190,800) (200,000) (161,280)
9.125% Senior Notes, due December 15, 2011 (275,000) (283,250) - -
7.75% Notes, due April 15, 2007 (279,479) (272,492) (298,251) (217,723)
7.70% Senior Notes, due January 15, 2004 ( 22,100) ( 22,874) (200,000) (160,000)
Mortgages and Other Notes, due 2002
through 2018 ( 3,387) ( 3,387) ( 28,658) ( 28,658)
U.S. Bank Borrowings - - (194,607) (194,607)
Fair value for the public debt securities is based on quoted market
prices. As of February 23, 2002 and February 24, 2001, the carrying values of
cash and cash equivalents, accounts receivable and accounts payable approximated
fair values due to the short-term maturities of these instruments.
49
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Note 8 - 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. In
addition, the Company also leases some store equipment and trucks. 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.
The Consolidated Balance Sheets include the following:
February 23, February 24,
2002 2001
------------- ----------------
Real property leased under capital leases $ 193,568 $ 205,409
Accumulated amortization (116,768) (120,651)
----------- -----------
Net property leased under capital leases $ 76,800 $ 84,758
=========== ===========
During fiscal 2001, the Company did not enter into any new capital
leases. During fiscal 2000 and 1999, the Company entered into new capital leases
totaling $7 million and $16 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 $13 million in fiscal 2001 and $14 million in both
fiscal 2000 and 1999.
Rent expense for operating leases during the last three fiscal years
consisted of the following:
Fiscal 2001 Fiscal 2000 Fiscal 1999
---------------- --------------- ---------------
Minimum rentals $ 249,509 $ 219,113 $ 194,158
Contingent rentals 4,126 3,777 3,780
----------- ----------- -----------
Total rent expense $ 253,635 $ 222,890 $ 197,938
=========== =========== ===========
50
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Future minimum annual lease payments for capital leases and noncancelable
operating leases in effect at February 23, 2002 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 67 stores to the franchise business. Included in the
operating lease column in the table below are the rental payments to be made by
the Company partially offset by the rental income to be received from the
franchised stores.
Capital
Leases
Real Operating
Fiscal Property Leases
------ ------------ -------------
2002 $ 22,267 $ 248,979
2003 20,075 242,185
2004 18,593 228,769
2005 14,577 221,361
2006 13,038 213,149
2007 and thereafter 124,961 2,196,357
------------ -------------
213,511 $ 3,350,800
=============
Less executory costs (692)
------------
Net minimum rentals 212,819
Less interest portion (108,541)
------------
Present value of net minimum rentals $ 104,278
============
During fiscal 2000 an agreement was entered into which provided financing
for software purchases and hardware leases up to $71 million in the aggregate
primarily relating to the 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 relating to software
purchases of approximately $29 million were to be repaid over the next several
months. Accordingly, as of February 23, 2002, substantially all of this balance
had been repaid. Additionally, the monthly payment amount was amended to reflect
expected utilization related to hardware leases. As of February 23, 2002,
approximately $30 million had been funded related to hardware leases. Future
payments related to these leases are included in the future minimum annual lease
payments table on the previous page. There will be no further funding under this
agreement. 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".
51
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Note 9 - Income Taxes
The Company has amended this footnote for all periods presented to
correct a classification error between its United States Retail operations and
its Canada Retail operations.
The components of (loss) income before income taxes and extraordinary
item are as follows:
Fiscal 2001 Fiscal 2000 Fiscal 1999
---------------- --------------- ---------------
United States $ (151,556) $ (66,035) $ 33,843
Canadian 43,282 35,799 29,012
----------- ---------- ---------
Total $ (108,274) $ (30,236) $ 62,855
=========== ========== =========
The benefit from (provision for) income taxes before extraordinary item
consists of the following:
Fiscal 2001 Fiscal 2000 Fiscal 1999
---------------- --------------- ---------------
Current:
Federal $ - $ - $ (872)
Canadian (708) (531) (710)
State and local (3,000) (3,000) (3,003)
----------- ---------- ----------
(3,708) (3,531) (4,585)
----------- ---------- ----------
Deferred:
Federal 47,654 21,565 (10,898)
Canadian (19,336) (16,372) (12,837)
State and local 18,980 9,074 778
----------- ---------- ----------
47,298 14,267 (22,957)
----------- ---------- ----------
Benefit from (provision for) income taxes $ 43,590 $ 10,736 $ (27,542)
=========== ========== ==========
The deferred income tax benefit (provision) resulted 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, and
net operating tax loss carryforwards.
The deferred tax benefit recorded for U.S. operations of approximately
$67 million mainly relates to book and tax differences of the asset
disposition initiative recorded in fiscal 2001. Included in the Canadian amount
for fiscal 2001 is 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
fiscal 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.
During fiscal 2001, the Ontario government enacted corporate income tax
rate changes, gradually reducing the rate from 14% to 8% by January 1, 2005.
This Canadian tax rate reduction did not have a significant impact on the
financial statements for fiscal 2001.
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.
52
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
As of February 23, 2002, the Company had net operating tax loss
carryforwards of approximately $17 million from the Canadian operations and $203
million from the U.S. operations. On March 9, 2002, U.S. legislation was enacted
that extended the 2 year carryback provisions to 5 years to offset prior taxable
income. As a result of this legislation, the Company was able to carryback
approximately $110 million of the U.S. net operating tax loss to prior years.
Accordingly after the impact of the carryback, the Company has $93 million of
net operating tax loss carryforwards from U.S. operations. The Canadian portion
of the net operating loss carryforwards will expire between February 2003 and
February 2009 and the U.S. portion will expire between February 2019 and
February 2022. The Company has assessed its ability to utilize the net operating
loss carryforwards and concluded that no valuation allowance currently is
required since the Company believes 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 they can be utilized by the Company to reduce its income tax obligations.
A reconciliation of income taxes at the 35% federal statutory income tax
rate for fiscal 2001, 2000 and 1999 to income taxes as reported is as follows:
Fiscal 2001 Fiscal 2000 Fiscal 1999
---------------- --------------- ---------------
Income tax benefit (provision) computed
at federal statutory income tax rate $ 37,899 $ 10,583 $ (21,999)
State and local income taxes, net of
federal tax benefit 10,532 3,948 (1,447)
Tax rate differential relating
to Canadian operations (4,896) (4,373) (3,394)
Goodwill and other permanent differences 55 578 (702)
----------- ---------- ----------
Income tax benefit (provision), as reported $ 43,590 $ 10,736 $ (27,542)
=========== ========== ==========
Income tax payments, net of refunds, for fiscal 2001, 2000 and 1999 were
approximately $0.2 million, $2 million and $6 million, respectively.
53
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The components of net deferred tax assets (liabilities) are as follows:
February 23,
2002 February 24, 2001
------------- -------------
Current assets:
Insurance reserves $ 26,481 $ 27,073
Other reserves and accrued benefits 47,299 40,435
Accrued postretirement and postemployment benefits 756 1,111
Lease obligations 899 1,198
Pension obligations 2,030 1,776
Miscellaneous 4,290 4,505
------------- -------------
81,755 76,098
------------- -------------
Current liabilities:
Inventories (8,815) (9,482)
Health and welfare (8,840) (9,631)
Miscellaneous (2,677) (2,751)
------------- -------------
(20,332) (21,864)
------------- -------------
Deferred income taxes included in prepaid expenses and
other current assets $ 61,423 $ 54,234
============= =============
Non-current assets:
Isosceles investment $ - $ 42,617
Alternative minimum tax 7,500 7,500
Other reserves including asset disposition charges 113,880 66,503
Lease obligations 9,473 13,193
Net operating loss carryforwards 168,345 121,288
Insurance reserves 15,539 17,748
Accrued postretirement and postemployment benefits 25,938 28,259
Pension obligations 9,494 9,503
Step rents 22,095 19,526
Miscellaneous 4,742 768
------------- -------------
377,006 326,905
------------- -------------
Non-current liabilities:
Fixed assets (266,159) (254,907)
Pension obligations (16,747) (23,205)
Miscellaneous (2,430) (2,463)
------------- -------------
(285,336) (280,575)
------------- -------------
Net non-current deferred income tax asset included in other assets $ 91,670 $ 46,330
============= =============
54
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Note 10 - 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.
The components of net pension (income) cost were as follows:
Fiscal 2001 Fiscal 2000 Fiscal 1999
---------------- --------------- ---------------
Service cost $ 8,679 $ 8,017 $ 16,153
Interest cost 19,045 19,192 26,300
Expected return on plan assets (27,116) (25,429) (34,890)
Amortization of unrecognized net asset (762) (1,255) (1,194)
Amortization of unrecognized net prior
service cost 584 910 1,240
Amortization of unrecognized net
actuarial (gain) loss (2,000) (1,432) 730
Curtailments and settlements - 668 1,205
Termination benefits and other 569 - -
----------- ---------- ----------
Net pension (income) cost $ (1,001) $ 671 $ 9,544
=========== ========== ==========
The Company's U.S. defined benefit pension plans are accounted for on a
fiscal year basis, while the Company's Canadian defined benefit pension plans
are accounted for on a calendar year basis. The majority of plan assets are
invested in listed stocks and bonds. The following tables set forth the change
in benefit obligations and change in plan assets for fiscal 2001 and 2000 for
the Company's defined benefit plans:
Change in Benefit Obligation 2001 2000
---------------------------- ------------- -------------
Benefit obligation - beginning of year $ 274,619 $ 393,614
Service cost 8,679 8,017
Interest cost 19,045 19,192
Actuarial loss 14,649 12,467
Benefits paid (21,712) (23,399)
Amendments 794 29
Curtailments and settlements - (122,633)
Termination benefits 361 -
Effect of exchange rate (5,555) (12,668)
----------- ------------
Benefit obligation - end of year $ 290,880 $ 274,619
=========== ===========
Change in Plan Assets
---------------------
Plan assets at fair value - beginning of year $ 346,780 $ 464,438
Actual return on plan assets 13,321 53,441
Company contributions 2,891 5,218
Benefits paid (21,712) (23,399)
Curtailments and settlements - (136,981)
Effect of exchange rate (6,910) (15,937)
----------- ------------
Plan assets at fair value - end of year $ 334,370 $ 346,780
=========== ===========
55
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Amounts recognized on the Company's Consolidated Balance Sheets consisted
of the following:
2001 2000
------------- -------------
Plan assets in excess of projected benefit obligation $ 43,490 $ 72,161
Unrecognized net transition asset (1,068) (1,881)
Unrecognized prior service cost 2,558 2,419
Unrecognized net actuarial gain (25,967) (56,231)
Interim contributions between calendar and fiscal year end - 268
----------- -----------
Total recognized on the Consolidated Balance Sheets $ 19,013 $ 16,736
=========== ===========
Prepaid benefit cost $ 47,805 $ 44,592
Accrued benefit liability (29,963) (28,036)
Intangible asset 995 116
Accumulated other comprehensive loss 102 38
Tax benefit 74 26
----------- -----------
Total recognized on the Consolidated Balance Sheets $ 19,013 $ 16,736
=========== ===========
Plans with accumulated benefit obligation in excess of plan assets
consisted of the following:
2001 2000
------------- -------------
Accumulated benefit obligation $ 45,192 $ 21,998
Projected benefit obligation $ 45,894 $ 22,705
Plan assets at fair value $ 19,709 $ 275
The prepaid pension asset is included in "Other assets" on the
Consolidated Balance Sheets while the pension liability is included in "Accrued
salaries, wages and benefits" and "Other non-current liabilities".
At February 23, 2002 and February 24, 2001, the Company's additional
minimum pension liability for its defined benefit plans exceeded the aggregate
of the unrecognized prior service costs and the net transition obligation.
Accordingly, stockholders' equity was reduced by $0.1 million and less than $0.1
million, 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 that resulted 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, for the year ended February 24,
2001, 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.
56
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Actuarial assumptions used to determine year-end plan status are as
follows:
2001 2000
---------------------- ----------------------
U.S. Canada U.S. Canada
--------- -------- -------- ---------
Weighted average discount rate 7.00% 6.50% 7.50% 7.00%
Weighted average rate of compensation increase 4.00% 4.00% 4.50% 4.00%
Expected long-term rate of return on plan assets 8.00% 8.50% 7.50-8.50% 8.50%
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 2002.
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
$12.3 million, $11.3 million and $10.8 million in fiscal years 2001, 2000 and
1999, respectively.
Multi-employer Union Pension Plans
The Company participates in various multi-employer union pension plans
which are administered jointly by management and union representatives and which
sponsor most full-time and certain part-time union employees who are not covered
by the Company's other pension plans. The pension expense for these plans
approximated $37.5 million, $35.3 million and $31.5 million in fiscal 2001, 2000
and 1999, 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. These
benefits are accounted for on a calendar year basis.
The components of net postretirement benefits cost are as follows:
52 Weeks Ended
----------------------------------------------------
December 31, December 31, December 31,
2001 2000 1999
----------------- ---------------- -----------------
Service cost $ 565 $ 487 $ 548
Interest cost 2,365 2,060 1,977
Prior service cost (1,380) (1,347) (1,347)
Amortization of gain (123) (692) (509)
----------- ----------- -----------
Net postretirement benefits cost $ 1,427 $ 508 $ 669
========== =========== ===========
57
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The unfunded status of the plans is as follows:
December 31, December 31,
2001 2000
---------------- ---------------
Unfunded accumulated benefit obligation
at beginning of year $ 33,713 $ 28,190
Service cost 565 487
Interest cost 2,365 2,060
Benefits paid (2,248) (1,937)
Actuarial loss (gain) 1,240 6,131
Foreign exchange (496) (1,218)
----------- ----------
Accumulated benefit obligation at end of year 35,139 33,713
Unrecognized net gain from experience differences 1,521 2,658
Unrecognized prior service cost 12,317 13,715
---------- ----------
Accrued postretirement benefit costs at end of year $ 48,977 $ 50,086
========== ==========
Assumed discount rate:
U.S. 6.75% 7.50%
Canada 6.75% 7.00%
The assumed rate of future increase in health care benefit cost for
fiscal 2001 was 8.50% and is expected to decline to 5.0% by the year 2020 and
remain at that level thereafter. The effect of a 1% change in the assumed health
care cost trend rate for each future year on the net postretirement health care
cost would either increase or decrease by $0.1 million, while the accumulated
postretirement benefit obligation would either increase by $1.6 million or
decrease by $1.4 million.
Postemployment Benefits
The Company accrues costs for pre-retirement, 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 23, 2002. As of February
23, 2002 and February 24, 2001, the Company had a liability reflected on the
Consolidated Balance Sheets of $24.7 million and $23.6 million, respectively,
related to such benefits.
Note 11 - Stock Options
At February 23, 2002, 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.
58
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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 both fiscal 2001 and fiscal 2000 and 3,600 in fiscal 1999. At February 23,
2002, there were 67,600 options available for grants under this plan.
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 2001, options granted under the 1998 Plan and the 1994 Plan totaled
1,172,113 and 326,400, respectively. There were no SAR's granted during fiscal
2001. At February 23, 2002, there were 1,825,320 and 193,800 options available
for grants under the 1998 Plan and 1994 Plan, respectively.
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:
Fiscal 2001 Fiscal 2000 Fiscal 1999
---------------- --------------- ---------------
Net (loss) income:
As reported $ (71,906) $ (19,500) $ 35,313
Pro forma $ (76,865) $ (23,643) $ 32,428
Net (loss) income per share - basic and diluted
As reported $ (1.88) $ (0.51) $ 0.92
Pro forma $ (2.00) $ (0.62) $ 0.85
The pro forma effect on net (loss) income and net (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.
59
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The fair value of the fiscal 2001, 2000 and 1999 option grants was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
Fiscal 2001 Fiscal 2000 Fiscal 1999
------------------ ------------------ ------------------
Expected life 7 years 7 years 7 years
Volatility 55% 60% 30%
Dividend yield range 0% 0%-4.60% 1.08%-1.42%
Risk-free interest rate range 4.07%-5.40% 4.94%-6.69% 5.37%-6.78%
With respect to SAR's, for fiscal 2001, the Company recognized
compensation expense of $0.5 million. For fiscal 2000, no expense was recorded
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. There was no
compensation expense recognized for the other fixed plans since the exercise
price of the stock options equaled the fair market value of the Company's common
stock on the date of grant.
A summary of option transactions is as follows:
Officers, Key Employees and Directors
------------------------------------ Weighted
Average
Exercise
Shares Price
Outstanding February 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
Granted 1,506,513 9.48
Cancelled or expired (419,780) 25.61
Exercised (20,412) 14.85
--------- ---------
Outstanding February 23, 2002 4,310,985 $ 18.84
========= =========
Exercisable at:
February 24, 2001 1,046,205 $ 29.55
February 23, 2002 1,393,561 $ 26.97
The weighted average fair values of options granted during the last three
fiscal years are as follows:
Fiscal 1999 $ 12.64
Fiscal 2000 $ 8.80
Fiscal 2001 $ 5.77
60
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
A summary of stock options outstanding and exercisable at February 23,
2002 is as follows:
Weighted
Options Average Weighted Options Weighted
Average Range Outstanding Remaining Average Exercisable Average
of Exercise at Contractual Exercise at Exercise
Prices 2/23/02 Life Price 2/23/02 Price
------------------------ ------------- ------------- -------------- ------------- -------------
$ 7.44 - $10.87 1,690,863 9.0 years $ 8.89 34,550 $ 8.54
$11.63 - $16.31 44,667 9.3 years $13.91 1,919 $16.24
$17.30 - $18.88 1,021,862 8.1 years $17.96 278,218 $17.95
$21.50 - $30.00 521,950 4.5 years $27.48 479,283 $27.56
$30.25 - $31.75 655,350 6.8 years $31.39 402,600 $31.34
$32.31 - $37.00 376,293 7.3 years $32.70 196,991 $32.70
--------- ---------
4,310,985 1,393,561
========== =========
A summary of SAR transactions is as follows:
Officers and Key Employees
- --------------------------
Price Range
Shares Per Share
--------------- ----------------------
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
Cancelled or expired (265,625) 23.38 - 24.75
Exercised (9,375) 23.38 - 45.38
------------ -------------------
Outstanding February 23, 2002 232,762 $ 21.88 - $31.63
============ ===================
Exercisable at:
February 24, 2001 506,512 $ 21.88 - $45.38
February 23, 2002 232,762 $ 21.88 - $31.63
61
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Note 12 - Commitments and Contingencies
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 one of the
Food Emporium's stores 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 May 2001, the federal court granted plaintiffs' motion for certification of a
class action. On June 18, 2002, the plaintiffs, the Attorney General and the
Company entered into a Memorandum of Understanding providing for a settlement of
the actions brought by the plaintiff class and by the Attorney General. Under
the proposed settlement, the Company would pay approximately $3 million in full
settlement of the actions and would receive releases from the class and the
Attorney General, and the actions would be dismissed with prejudice. The
proposed settlement remains subject to, among other things, execution of a
definitive settlement agreement and the approval of the federal court. The
settlement amount has been accrued for and is included in "Other accruals" on
the Company's Consolidated Balance Sheets.
On June 5, 2002, a purported securities class action Complaint was filed
in the United States District Court for the District of New Jersey against the
Company and certain of its officers and directors in an action captioned Brody
v. The Great Atlantic & Pacific Tea Co., Inc., et al., Civ. Action No. 02-2674
(FSH) (D.N.J.). On June 17, 2002 and June 26, 2002, two similar purported class
action Complaints, captioned Huelsman v. The Great Atlantic & Pacific Tea Co.,
Inc., et al., Civ. Action No. 02-2882 (JAG) (D.N.J.), and Davis v. The Great
Atlantic & Pacific Tea Co., Inc., et. al., Civ. Action No. 02-3059 (WGB)
(D.N.J.), respectively, were filed in the same federal district court. (The
lawsuits are referred to collectively hereinafter as the "Class Action
Lawsuits.") The Complaints in the Class Action Lawsuits purport to assert claims
under Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the
Securities Exchange Act of 1934 arising out of the Company's accounting
practices, and allege that the Company made material misrepresentations and
omissions concerning its financial results. The Complaints in the Class Action
Lawsuits seek unspecified money damages, costs and expenses.
On May 31, 2002, a stockholders' derivative Complaint was filed in the
Superior Court of New Jersey in Bergen County against the Company's Board of
Directors and certain of its executive officers in an action entitled Osher v.
Barlin, et al., Civ. Action No. BER L-4673-02 (N.J. Super. Ct.). The Complaint
alleges that the defendants violated their fiduciary obligations to the Company
and its stockholders by failing to establish and maintain adequate accounting
controls and mismanaging the assets and business of the Company, and seeks
unspecified money damages, costs and expenses.
62
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
The Company is also subject to certain environmental claims. While the outcome
of these claims cannot be predicted with certainty, Management does not believe
that the outcome of any of these legal matters will have a material adverse
effect on the Company's consolidated results of operations, financial position
or cash flows.
As part of the Company's business process initiative, contracts have been
entered committing the Company to purchase hardware, software and consulting
services from various vendors. At February 23, 2002, these commitments totaled
$36.1 million. These purchases will be made, in accordance with the terms of
their contracts, over the next three fiscal years.
The Company is the guarantor of a debt commitment of $2.5 million which
will expire in 2011.
The Company has product supply agreements that require it to make
purchases totaling $58 million as of February 23, 2002.
Note 13 - Operating Segments
The Company has amended this footnote for all periods presented to
correct a classification error between its United States Retail operations and
its Canada Retail operations.
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.
63
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Information on segments is as follows:
OPERATING DATA Fiscal 2001 Fiscal 2000 Fiscal 1999
- -------------- ----------------- ------------------ ------------------
Sales
U.S. Retail $ 8,490,104 $ 8,247,224 $ 7,981,134
Canada Retail 1,806,705 1,745,129 1,646,712
Canada Wholesale 676,506 630,513 523,488
--------------- --------------- ----------------
Total Company $ 10,973,315 $ 10,622,866 $ 10,151,334
=============== =============== ================
Depreciation and amortization
U.S. Retail $ 227,257 $ 223,550 $ 204,975
Canada Retail 35,295 32,221 27,413
Canada Wholesale - - 324
--------------- --------------- ----------------
Total Company $ 262,552 $ 255,771 $ 232,712
=============== =============== ================
(Loss) income from operations
U.S. Retail $ (71,359) $ 21,999 $ 110,023
Canada Retail 21,301 20,380 18,961
Canada Wholesale 26,534 23,651 18,098
--------------- --------------- ----------------
Total Company $ (23,524) $ 66,030 $ 147,082
=============== =============== ================
Interest expense
U.S. Retail $ (81,574) $ (88,084) $ (76,497)
Canada Retail (7,557) (11,436) (11,504)
Canada Wholesale (2,591) (2,968) (2,444)
--------------- --------------- ----------------
Total Company $ (91,722) $ (102,488) $ (90,445)
=============== =============== ================
Interest income
U.S. Retail $ 1,377 $ 50 $ 317
Canada Retail 1,970 2,099 2,521
Canada Wholesale 3,625 4,073 3,380
--------------- --------------- ----------------
Total Company $ 6,972 $ 6,222 $ 6,218
=============== =============== ================
(Loss) income before income taxes and
extraordinary item
U.S. Retail $ (151,556) $ (66,035) $ 33,843
Canada Retail 15,714 11,043 9,978
Canada Wholesale 27,568 24,756 19,034
--------------- --------------- ----------------
Total Company $ (108,274) $ (30,236) $ 62,855
=============== =============== ================
64
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
February 23, February 24, February 26,
FINANCIAL POSITION DATA 2002 2001 2000
- ----------------------- ----------------- ------------------ ------------------
Capital expenditures
U.S. Retail $ 192,705 $ 356,850 $ 416,863
Canada Retail 53,477 58,992 61,444
Canada Wholesale - - 1,265
--------------- --------------- ----------------
Total Company $ 246,182 $ 415,842 $ 479,572
=============== =============== ================
Total assets
U.S. Retail $ 2,599,628 $ 2,688,190 $ 2,680,221
Canada Retail 521,278 549,182 567,810
Canada Wholesale 73,358 81,785 83,328
--------------- --------------- ----------------
Total Company $ 3,194,264 $ 3,319,157 $ 3,331,359
=============== =============== ================
Long-lived assets
United States $ 1,451,235 $ 1,637,036 $ 1,652,094
Canada 289,088 287,211 265,818
--------------- --------------- ----------------
Total Company $ 1,740,323 $ 1,924,247 $ 1,917,912
=============== =============== ================
Note 14 - Sale-Leaseback Transactions
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 lives 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 9 additional properties and
simultaneously leased them back from the purchaser. The properties subject to
this sale had a carrying value of approximately $52 million. Net proceeds
received by the Company related to these transactions amounted to approximately
$65 million. Of the 9 properties sold, 6 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 lives of the respective leases as a reduction of
rental expense. Three properties in the aforementioned transaction were sold at
a loss of approximately $4 million after expenses. The majority of this loss was
related to one of these properties, which was anticipated at the end of fiscal
2000, and, accordingly, was recognized in full at that time since the carrying
value of such property exceeded its fair value less the cost of disposal.
The Company expects to enter into similar transactions with other owned
properties from time to time in the future.
65
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The resulting leases of the 21 properties sold in fiscal 2000 and 2001
have terms ranging from 20 to 25 years, with options to renew for additional
periods, and are being accounted for as operating leases in accordance with SFAS
No. 13, "Accounting for Leases". Future minimum lease payments for these
operating leases, which have been included in the future minimum lease payments
table in Note 8 - Lease Obligations, are as follows:
Fiscal
------
2002 $ 20,612
2003 20,612
2004 20,612
2005 20,612
2006 20,612
2007 and thereafter 319,925
-----------
Total $ 422,985
===========
Note 15 - Gain On Proceeds From The Demutualization Of A Mutual Insurance
Company
During the fourth quarter of fiscal 2001, the Company received cash and
common stock totaling $60.6 million from the demutualization of The Prudential
Insurance Company. This amount was recorded as a nonrecurring gain and included
in the determination of pretax income for fiscal 2001. At February 23, 2002, the
Company had an unrealized gain of $0.9 million related to the aforementioned
common stock held as available for sale securities that was recorded as a
separate component of Stockholders' Equity.
Note 16 - Related Party Transactions
A&P Properties Limited, an indirect subsidiary of the Company, leases a
store in Windsor, Ontario, Canada that sits on property of Tenga Capital
Corporation, which is owned by Erivan and Helga Haub. Erivan Haub is the father
of Christian W. E. Haub, the Company's Chairman and Chief Executive Officer, and
owns a controlling interest in Tengelmann, which owns a controlling interest of
the Company's common stock. Helga Haub is the mother of Christian W. E. Haub and
is a member of the Company's Board of Directors. The initial term of the lease,
which commenced in 1983, expires on October 31, 2003, with four 5-year renewal
options. The base annual rental is CN$0.5 million (U.S. $0.3 million at February
23, 2002), with percentage rents subject to specified caps.
66
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The Company is a party to agreements granting Tengelmann and its
affiliates the exclusive right to use the "A&P(R)" and "Master Choice(R)"
trademarks in Germany and other European countries pursuant to which it received
$0.1 million during each of fiscal 2001, 2000 and 1999 which is the maximum
annual royalty fee under such agreements. The Company is also a party to
agreements under which it purchased from Wissoll, which is an affiliate of
Tengelmann, approximately $0.6 million, $0.7 million and $1.0 million worth of
the Black Forest line and Master Choice(R) candy during fiscal 2001, 2000 and
1999, respectively.
The Company owns a jet aircraft which Tengelmann leases under a full cost
reimbursement lease that also allows the Company to charter the aircraft for its
use at a below market charter rate. During fiscal 2001, 2000 and 1999,
Tengelmann was obligated to reimburse the Company $2.5 million, $3.2 million and
$3.2 million, respectively, for its use of the aircraft.
Note 17 - Environmental Liability
The Company owns a non-retail real estate location that was subjected to
environmental contamination. 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 $3.0 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.
During the fourth quarter of fiscal 2001, due to an unfavorable ruling by
the local municipality, which was subsequently upheld by the New Jersey Superior
Court, denying the Company's proposed development plan, the Company determined
that a decrease in the value of the property had occurred, and recorded an
additional charge of $2.0 million. The total liability, net of costs incurred to
date, of $5.0 million was included in "Other non-current liabilities" on the
Consolidated Balance Sheets at February 23, 2002.
67
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Note 18 - Summary of Quarterly Results (Unaudited)
The following table summarizes the Company's results of operations by
quarter for fiscal 2001 and 2000. The first quarter of each fiscal year contains
sixteen weeks, while the other quarters each contain twelve weeks.
As Restated (e) As Revised (e)
-------------------------------------------- ----------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------- ------------- -------------- ------------- -------------
(Dollars in thousands, except per share amounts)
2001
- ----
Sales $3,388,294 $2,547,590 $2,525,388 $2,512,043 $10,973,315
Gross margin 970,434 737,376 726,912 715,944 3,150,666
Depreciation and amortization 82,205 61,051 61,697 57,599 262,552
Income (loss) from operations (a) 29,625 16,276 (135,284) 65,859 (23,524)
Interest expense (30,505) (20,969) (20,495) (19,753) (91,722)
(Loss) income before income
taxes and extraordinary item 962 (2,801) (154,329) 47,894 (108,274)
Extraordinary loss on early
extinguishment of debt, net of tax - - - (7,222) (7,222)
Net (loss) income (b) (969) (1,743) (89,636) 20,442 (71,906)
Per share data:
(Loss) income before extraordinary
item - basic (c) (0.03) (0.05) (2.34) 0.72 (1.69)
Extraordinary loss on early
extinguishment of debt - basic - - - (0.19) (0.19)
Net (loss) income - basic (0.03) (0.05) (2.34) 0.53 (1.88)
(Loss) income before extraordinary
item - diluted (d) (0.03) (0.05) (2.34) 0.70 (1.69)
Extraordinary loss on early
extinguishment of debt - diluted (d) - - - (0.18) (0.19)
Net (loss) income - diluted (d) (0.03) (0.05) (2.34) 0.52 (1.88)
Such amounts are comprised of the following; item (b) is net of
applicable income taxes:
(a) Asset disposition initiative $ - $ (217) $(164,658) $(28,593) $(193,468)
Gain on proceeds from insurance
company demutualization - - - 60,606 60,606
All other earnings from operations 29,625 16,493 29,374 33,846 109,338
------ ------ ------ ------ -------
Income (loss) from operations $ 29,625 $ 16,276 $(135,284) $ 65,859 $ (23,524)
======== ======== ========= ======== =========
(b) Asset disposition initiative $ - $ (126) $ (95,529) $(16,613) $(112,268)
Gain on proceeds from insurance
company demutualization - - - 35,151 35,151
Extraordinary loss on early
extinguishment of debt - - - (7,222) (7,222)
All other (losses) earnings (969) (1,617) 5,893 9,126 12,433
---- ------ ----- ----- ------
Net (loss) income $ (969) $ (1,743) $ (89,636) $ 20,442 $ (71,906)
====== ======== ========= ======== =========
(c) The sum of quarterly basic income per share differs from full year amounts
because the number of weighted average common shares outstanding has
increased each quarter.
(d) The sum of quarterly diluted income per share differs from the full year
amounts because securities that are dilutive in the fourth quarter are
antidilutive on a full-year basis.
(e) See Note 2 - Restatement of Previously Issued Financial Statements and the
tables below.
68
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
As previously reported As previously announced (c)
-------------------------------------------- ----------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------- ------------- -------------- ------------- -------------
(Dollars in thousands, except per share amounts)
2001
- ----
Sales $3,388,294 $2,547,590 $2,525,388 $2,512,043 $10,973,315
Gross margin 961,022 738,497 725,437 717,948 3,142,904
Depreciation and amortization 82,205 61,051 61,697 57,599 262,552
Income (loss) from operations (a) 17,542 12,625 (141,284) 62,831 (48,286)
Interest expense (29,060) (19,884) (19,410) (18,668) (87,022)
(Loss) income before income
taxes and extraordinary item (9,676) (5,367) (159,244) 45,951 (128,336)
Extraordinary loss on early
extinguishment of debt, net of tax - - - (7,222) (7,222)
Net (loss) income (b) (7,139) (3,231) (92,487) 19,315 (83,542)
Per share data:
(Loss) income before extraordinary
Item - basic (0.19) (0.08) (2.41) 0.69 (1.99)
Extraordinary loss on early
extinguishment of debt - basic - - - (0.19) (0.19)
Net (loss) income - basic (0.19) (0.08) (2.41) 0.50 (2.18)
(Loss) income before extraordinary
item - diluted (0.19) (0.08) (2.41) 0.67 (1.99)
Extraordinary loss on early
extinguishment of debt - diluted - - - (0.18) (0.19)
Net (loss) income - diluted (0.19) (0.08) (2.41) 0.49 (2.18)
The following information was not subject to restatement.
- ---------------------------------------------------------
Market price:
High 14.00 20.30 23.95 27.20
Low 8.13 12.51 13.18 20.66
Number of stores at end of period 747 743 740 702
Number of franchised stores
served at end of period 67 67 67 67
Such amounts are comprised of the following; item (b) is net of
applicable income taxes:
(a) Asset disposition initiative $ - $ (217) $(164,658) $ (28,593) (193,468)
Gain on proceeds from insurance
company demutualization - - - 60,606 60,606
All other earnings from operations 17,542 12,842 23,374 30,818 84,576
--------- ----------- --------- --------- ---------
(Loss) income from operations $ 17,542 $ 12,625 $(141,284) $ 62,831 $ (48,286)
========= =========== ========= ========= =========
(b) Asset disposition initiative $ - $ (126) $ (95,529) $ (16,613) $(112,268)
Gain on proceeds from insurance
company demutualization - - - 35,151 35,151
Extraordinary loss on early
extinguishment of debt - - - (7,222) (7,222)
All other (losses) earnings (7,139) (3,105) 3,042 7,999 797
--------- ----------- --------- --------- ---------
Net (loss) income $ (7,139) $ (3,231) $ (92,487) $ 19,315 $ (83,542)
========= =========== ========= ========= =========
(c) 2001 fourth quarter and full year results were announced in an earnings
release on April 4, 2002. First, second and third quarters were included in
the Company's Form 10-Q for each period filed with the Securities and
Exchange Commission.
69
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(As Restated - See Note 2)
--------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------- ------------- -------------- ------------- -------------
(Dollars in thousands, except per share amounts)
2000 (unaudited)
- ----------------
Sales $3,199,820 $2,439,534 $2,428,790 $2,554,722 $10,622,866
Gross margin 922,826 706,208 689,209 723,533 3,041,776
Depreciation and amortization 76,648 58,803 59,596 60,724 255,771
Income (loss) from operations 39,648 13,769 (3,201) 15,814 66,030
Interest expense (30,905) (23,609) (24,717) (23,257) (102,488)
Net income (loss) 5,505 (5,443) (15,984) (3,578) (19,500)
Per share data:
Net income (loss) - basic
and diluted 0.14 (0.14) (0.42) (0.09) (0.51)
As previously reported
--------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------- ------------- -------------- ------------- -------------
(Dollars in thousands, except per share amounts)
2000 (unaudited)
- ----------------
Sales $3,199,820 $2,439,534 $2,428,790 $2,554,722 $10,622,866
Gross margin 919,345 704,253 688,560 716,258 3,028,416
Depreciation and amortization 76,648 58,803 59,596 60,724 255,771
Income (loss) from operations 37,813 12,409 (2,184) 2,155 50,193
Interest expense (28,936) (22,132) (23,240) (21,780) (96,088)
Net income (loss) 5,584 (5,374) (14,513) (10,765) (25,068)
Per share data:
Net income (loss) - basic
and diluted 0.15 (0.14) (0.38) (0.28) (0.65)
The following information was not subject to restatement.
- ---------------------------------------------------------
Cash dividends 0.10 0.10 0.10 - 0.30
Market price:
High 24.06 17.88 11.50 11.85
Low 17.41 12.06 9.13 6.25
Number of stores at end
of period 749 750 751 752
Number of franchised stores
served at end of period 63 67 68 68
The effects of the restatement items on the quarterly income during
fiscal 2001 and 2000 is detailed below.
Before Tax (a)
- ----------
First Second Third Fourth Total
2001 (unaudited) Quarter Quarter Quarter Quarter Year
- ---------------- ------------- ------------- -------------- ------------- -------------
Vendor allowances
Irregularities 1,124 (5,436) (2,559) (1,597) (8,468)
Non-GAAP policy 8,524 4,612 4,109 (277) 16,968
Perishable inventory irregularity (236) (297) (75) (130) (738)
Self-insurance reserves 1,831 3,923 3,523 2,023 11,300
Closed store subleases (606) (236) (83) 1,925 1,000
------ ----- ----- ----- ------
Effect on pretax earnings 10,637 2,566 4,915 1,944 20,062
====== ===== ===== ===== ======
First Second Third Fourth Total
2000 (unaudited) Quarter Quarter Quarter Quarter Year
- ---------------- ------------- ------------- -------------- ------------- -------------
Vendor allowances
Irregularities (4,392) 379 (583) 1,057 (3,539)
Non-GAAP policy 7,891 1,815 1,244 6,335 17,285
Perishable inventory irregularity (18) (239) (12) (117) (386)
Self-insurance reserves (3,354) (2,515) (2,515) 7,085 (1,300)
Closed store subleases (261) 443 (628) (2,177) (2,623)
------ ------ ------ ------ ------
Effect on pretax earnings (134) (117) (2,494) 12,183 9,437
====== ====== ====== ====== ======
Effect on Net Income
- --------------------
First Second Third Fourth Total
2001 (unaudited) Quarter Quarter Quarter Quarter Year
- ---------------- ------------- ------------- -------------- ------------- -------------
Vendor allowances
Irregularities 652 (3,153) (1,484) (927) (4,912)
Non-GAAP policy 4,944 2,675 2,383 (160) 9,842
Perishable inventory irregularity (137) (172) (44) (75) (428)
Self-insurance reserves 1,063 2,275 2,043 1,173 6,554
Closed store subleases (353) (137) (47) 1,117 580
----- ----- ------ ------ ------
Effect on net income (loss) 6,169 1,488 2,851 1,128 11,636
===== ===== ====== ====== ======
First Second Third Fourth Total
2000 (unaudited) Quarter Quarter Quarter Quarter Year
- ---------------- ------------- ------------- -------------- ------------- -------------
Vendor allowances
Irregularities (2,591) 224 (344) 623 (2,088)
Non-GAAP policy 4,656 1,071 734 3,738 10,198
Perishable inventory irregularity (11) (141) (7) (69) (228)
Self-insurance reserves (1,979) (1,484) (1,484) 4,180 (767)
Closed store subleases (154) 261 (371) (1,284) (1,548)
------ ------ ------ ------ ------
Effect on net income (loss) (79) (69) (1,472) 7,188 5,568
====== ====== ====== ====== ======
(a) Changes to vendor allowances and perishable inventory irregularities
impact the cost of merchandise sold line on the Statements of Consolidated
Operations. Changes to closed store subleases impact the selling, general
and administrative expense line on the Statements of Consolidated
Operations. Changes to self-insurance reserves impact both the selling,
general and administrative expense and interest expense lines on the
Statements of Consolidated Operations as follows:
Selling general and
administrative expense
Fiscal 2001 3,277 5,008 4,608 3,108 16,000
Fiscal 2000 (1,385) (1,038) (1,038) 8,562 5,100
Interest expense
Fiscal 2001 (1,446) (1,085) (1,085) (1,085) (4,700)
Fiscal 2000 (1,969) (1,477) (1,477) (1,477) (6,400)
70
Management's Report on Financial Statements
- -------------------------------------------
The Management of The Great Atlantic & Pacific Tea Company, Inc. has
prepared the consolidated financial statements and related financial data
contained in this Annual Report. The financial statements were prepared in
accordance with generally accepted accounting principles appropriate to the
business and, by necessity and circumstance, include some amounts which were
determined using Management's best judgments and estimates with appropriate
consideration to materiality. Management is responsible for the integrity and
objectivity of the financial statements and other financial data included in
this report. To meet this responsibility, Management maintains a system of
internal accounting controls to provide reasonable assurance that assets are
safeguarded and that accounting records are reliable. Management supports a
program of internal audits and internal accounting control reviews to provide
reasonable assurance that the system is operating effectively.
The Board of Directors pursues its responsibility for reported financial
information through its Audit Committee. The Audit Committee meets periodically
and, when appropriate, separately with Management, internal auditors and the
independent auditors, Deloitte & Touche LLP, to review each of their respective
activities.
Christian W.E. Haub Mitchell P. Goldstein
Chairman of the Board, Senior Vice President,
Chief Executive Officer Chief Financial Officer
71
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
23, 2002 and February 24, 2001 and the related statements of consolidated
operations, consolidated stockholders' equity and comprehensive (loss) income,
and consolidated cash flows for each of the three fiscal years in the period
ended February 23, 2002. 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 23, 2002 and February
24, 2001 and the results of their operations and their cash flows for each of
the three fiscal years in the period ended February 23, 2002 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 2, the accompanying financial statements for the
years ended February 24, 2001 and February 26, 2000 have been restated and Note
2 has been subsequently revised to expand the related disclosures. As discussed
in Notes 1, 9 and 13, such notes to the financial statements have been revised
to provide additional disclosures of certain accounting policies and to correct
a classification error between its United States Retail operations and its
Canada Retail operations.
Deloitte & Touche LLP
Parsippany, New Jersey
August 19, 2002
72
Five Year Summary of Selected Financial Data
(As Restated - See Note 2)
---------------------------------
Fiscal 2001 Fiscal 2000 Fiscal 1999 Fiscal 1998 Fiscal 1997
(52 Weeks)(d) 52 Weeks)(d) (52 Weeks)(d) (52 Weeks)(c)(d) (53 Weeks)(c)(d)
--------------- ---------------- --------------- ---------------- -----------------
(unaudited) (unaudited)
(Dollars in thousands, except per share amounts)
Operating Results
Sales $10,973,315 $10,622,866 $10,151,334 $10,179,358 $10,262,243
(Loss) income from
operations (a) (23,524) 66,030 147,082 (149,337) 162,256
Depreciation and
amortization (262,552) (255,771) (232,712) (233,663) (234,236)
Interest expense (91,722) (102,488) (90,445) (71,497) (80,152)
Net (loss) income before
extraordinary item (64,684) (19,500) 35,313 (58,282) 67,714
Extraordinary loss on early
extinguishment of debt,
net of tax (7,222) - - - (544)
Net (loss) income (b) (71,906) (19,500) 35,313 (58,282) 67,170
Per Share Data
(Loss) income before
extraordinary item - basic (1.69) (0.51) 0.92 (1.52) 1.77
Extraordinary loss on early
extinguishment of debt - basic (0.19) - - - (0.01)
Net (loss) income - basic (1.88) (0.51) 0.92 (1.52) 1.76
(Loss) income before
extraordinary item - diluted (1.69) (0.51) 0.92 (1.52) 1.77
Extraordinary loss on early
extinguishment of debt - diluted (0.19) - - - (0.01)
Net (loss) income - diluted (1.88) (0.51) 0.92 (1.52) 1.76
Cash dividends - 0.30 0.40 0.40 0.40
Book value per share 17.54 19.53 20.65 20.76 22.88
Financial Position
Current assets $1,212,074 $1,197,873 $1,218,717 $1,243,110 $1,217,227
Current liabilities 1,184,463 1,130,062 1,153,173 1,134,063 955,130
Working capital 27,611 67,811 65,544 109,047 262,097
Current ratio 1.02 1.06 1.06 1.10 1.27
Expenditures for property 246,182 415,842 479,572 438,345 267,623
Total assets 3,194,264 3,319,157 3,331,359 3,160,814 2,995,253
Current portion of
long-term debt 526 6,195 2,382 4,956 16,824
Current portion of
capital lease obligations 10,691 11,634 11,327 11,483 12,293
Long-term debt 779,440 915,321 865,675 728,390 695,292
Long-term portion of
capital lease obligations 93,587 106,797 117,870 115,863 120,980
Total debt 884,244 1,039,947 997,254 860,692 845,389
Debt to total capitalization 57% 58% 56% 52% 49%
73
Five Year Summary of Selected Financial Data - Continued
(As Restated - See Note 2)
---------------------------------
Fiscal 2001 Fiscal 2000 Fiscal 1999 Fiscal 1998 Fiscal 1997
(52 Weeks)(d) (52 Weeks)(d) (52 Weeks)(d) (52 Weeks)(c)(d) (53 Weeks)(c)(d)
--------------- ---------------- --------------- ---------------- -----------------
(unaudited) (unaudited)
(Dollars in thousands, except per share amounts)
Equity
Stockholders' equity 672,988 748,811 792,138 794,783 875,276
Weighted average shares
outstanding 38,350,616 38,347,216 38,330,379 38,273,859 38,249,832
Number of registered
stockholders 6,087 6,281 6,890 7,419 8,029
Other
Number of employees 78,995 83,000 80,900 83,400 79,980
New store openings 21 47 54 46 40
Number of stores at
year end 702 752 750 839 936
Total store area
(square feet) 26,664,312 27,931,729 26,904,331 28,736,319 30,574,286
Number of franchised
stores served at year end 67 68 65 55 52
Total franchised store
area (square feet) 2,108,969 2,021,206 1,908,271 1,537,388 1,389,435
- ----------------------------------------------------------------------------------------------------------------------------
Such amounts are comprised of the
following; item (b) is net of
applicable income taxes:
(a) Asset disposition initiative $(193,468) $ - $ (59,886) $(279,415) $ -
Gain on proceeds from insurance
company demutualization 60,606 - - - -
All other earnings from operations 109,338 66,030 206,968 130,078 162,256
--------- --------- --------- --------- ---------
(Loss) income from operations $ (23,524) $ 66,030 $ 147,082 $(149,337) $ 162,256
========= ========= ========= ========= =========
(b) Asset disposition initiative $(112,268) $ - $ (34,836) $(166,517) $ -
Gain on proceeds from insurance
company demutualization 35,151 - - - -
Extraordinary loss on early
extinguishment of debt (7,222) - - - (544)
Reversal of deferred tax asset
valuation allowance - - - 60,300 -
All other earnings (losses) 12,433 (19,500) 70,149 47,935 67,714
--------- --------- --------- --------- ---------
Net (loss) income $ (71,906) $ (19,500) $ 35,313 $ (58,282) $ 67,170
========= ========= ========= ========= =========
(c) Fiscal 1997 and fiscal 1998 include adjustments consisting of a $2,900 charge and a $14,900 credit to self-insurance
expense and credits of $9,897 and $154 to closed store subleases, respectively. However, the Company is unable to
determine the adjustments to the vendor allowance amounts for fiscal 1997 and 1998 since sufficient documentation related to
this item is not available. While the adjustments required for fiscal 1997 and 1998 related to vendor allowances
cannot be determined with accuracy, Management does not believe that the financial data presented herein are no
longer indicative of the results for these periods.
(d) Not derived from audited financial information.
- --------------------------------------------------------------------------------------------------------------------
74
Executive Officers
- ------------------
Christian W.E. Haub
Chairman of the Board,
Chief Executive Officer
Elizabeth R. Culligan
President,
Chief Operating Officer
William P. Costantini
Senior Vice President,
General Counsel and Secretary
Mitchell P. Goldstein
Senior Vice President,
Chief Financial Officer
Laurane S. Magliari
Senior Vice President,
People Resources and Services
John E. Metzger
Senior Vice President,
Chief Information Officer
Richard P. De Santa
Vice President,
Corporate Affairs
- ----------------------------
Board Of Directors
- ------------------
Christian W.E. Haub (c)(d)
Chairman of the Board,
Chief Executive Officer
John D. Barline, Esq. (b)(c)(e)
Williams, Kastner & Gibbs LLP,
Tacoma, Washington
Rosemarie Baumeister (b)
Senior Vice President,
Tengelmann Warenhandelsgesellschaft,
Muelheim, Germany
Elizabeth R. Culligan (c)(d)
President,
Chief Operating Officer
Bobbie Gaunt (a)(b)
Former President and CEO,
Ford Motor Company of Canada
Helga Haub (c)(d)
Dan P. Kourkoumelis (a)(c)(e)
Former President and CEO,
Quality Food Centers, Inc.
Edward Lewis (c)(d)(e)
Chairman and Chief Executive Officer
Essence Communications Partners
Richard L. Nolan (a)(c)(e)
William Barclay Harding Professor of Management
Technology at the Harvard Business School
Maureen B. Tart-Bezer (a)(d)
Senior Financial Advisor
Wireless MVNO Ventures
(a) Member of Audit Committee Richard L. Nolan, Chairman
(b) Member of Compensation Committee John D. Barline, Chairman
(c) Member of Executive Committee Christian W.E. Haub, Chairman
(d) Member of Finance Committee Edward Lewis, Chairman
(e) Member of Governance Committee Dan P. Kourkoumelis, Chairman
75
Stockholder Information
- -----------------------
Executive Offices
Box 418
2 Paragon Drive
Montvale, NJ 07645
Telephone 201-573-9700
Independent Auditors
Deloitte & Touche LLP
Two Hilton Court
Parsippany, NJ 07054
Stockholder Inquiries and Publications
Stockholders, security analysts, members of the media and others interested in
further information about the Company are invited to contact the Investor
Relations Help Line at 201-571-4537.
Internet users can access information on A&P at: www.aptea.com
Correspondence concerning stockholder address changes or other stock account
matters should be directed to the Company's Transfer Agent & Registrar
American Stock Transfer and Trust Company
59 Maiden Lane
New York, NY 10038
Telephone 800-937-5449
www.amstock.com
Form 10-K
Copies of Form 10-K filed with the Securities and Exchange Commission will be
provided to stockholders upon written request to the Secretary at the Executive
Offices in Montvale, New Jersey.
Annual Meeting
The Annual Meeting of Stockholders will be held at 9:00 a.m. (EDT) on Tuesday,
July 30, 2002 at
White Elephant Hotel
50 Easton St.
Nantucket, Massachusetts
Common Stock
Common stock of the Company is listed and traded on the New York Stock Exchange
under the ticker symbol "GAP" and has unlisted trading privileges on the Boston,
Midwest, Philadelphia, Cincinnati, and Pacific Stock Exchanges. The stock is
generally reported in newspapers and periodical tables as "GtAtPc".
(C) 2002 The Great Atlantic & Pacific Tea Co., Inc.
All rights reserved.
76
Certification Accompanying Periodic Report
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. ss. 1350)
The undersigned, Christian W.E. Haub, Chairman of the Board and Chief Executive
Officer of The Great Atlantic and Pacific Tea Company, Inc. ("Company"), and
Mitchell P. Goldstein, Senior Vice President and Chief Financial Officer of the
Company, each hereby certifies that (1) the Annual Report of the Company on Form
10-K for the period ended February 23, 2002 as amended by Amendments Nos. 1 and
2 thereto (the "Report") fully complies with the requirements of Section 13(a)
of the Securities Exchange Act of 1934 and (2) the information contained in the
Report fairly presents, in all material respects, the financial condition and
the results of operations of the Company.
/s/ Christian W.E. Haub
-----------------------------------
Dated: August 22, 2002 Christian W.E. Haub
Chairman of the Board,
Chief Executive Officer
/s/ Mitchell P. Goldstein
-----------------------------------
Dated: August 22, 2002 Mitchell P. Goldstein
Senior Vice President,
Chief Financial Officer
77