UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended June 15, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
----------------------------------------------
(Exact name of registrant as specified in charter)
Maryland 13-1890974
-------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive
Montvale, New Jersey 07645
(Address of principal executive offices)
(201) 573-9700
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of June 15, 2002 the Registrant had a total of 38,511,074 shares of common
stock - $1 par value outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
16 Weeks Ended
---------------------------
June 16, 2001
(As Restated
June 15, 2002 See Note 2)
--------------- -------------
Sales $3,307,238 $3,388,294
Cost of merchandise sold (2,359,683) (2,417,860)
---------- ----------
Gross margin 947,555 970,434
Store operating, general and
administrative expense (919,784) (940,809)
--------- ----------
Income from operations 27,771 29,625
Interest expense (26,752) (30,505)
Interest income 1,959 1,842
--------- ---------
Income before income taxes and
extraordinary item 2,978 962
Provision for income taxes (706) (1,931)
--------- ----------
Income (loss) before extraordinary item 2,272 (969)
Extraordinary loss on early extinguishment
of debt, net of income tax benefit of $287 (397) -
--------- ---------
Net income (loss) $ 1,875 $ (969)
========= =========
Net income (loss) per share - basic and diluted:
Income (loss) before extraordinary item $ 0.06 $ (0.03)
Extraordinary loss on early
extinguishment of debt (0.01) -
--------- ---------
Net income (loss) per share - basic and
diluted $ 0.05 $ (0.03)
=========== =========
Weighted average number of
common shares outstanding 38,450,102 38,347,216
Common stock equivalents 1,012,148 161,433
--------- ----------
Weighted average number of common and
common equivalent shares outstanding 39,462,250 38,508,649
========== ==========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Stockholders' Equity and Comprehensive Income
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Accumu-
lated
Other
Addit- Compre- Total
Common Stock ional hensive Stock
--------------- Paid-in Retained (Loss)/ holders'
Shares Amount Capital Earnings Income Equity
------ ------ ------- -------- ------ ------
16 Week Period Ended
June 15, 2002
--------------------
Balance at
beginning
of period 38,367,628 $38,368 $456,753 $254,896 $(77,029) $672,988
Net income 1,875 1,875
Other comprehensive
income 6,765 6,765
Stock options
exercised 143,446 143 2,617 2,760
-------- ------- ------- -------- ------- -------
Balance at end
of period 38,511,074 $38,511 $459,370 $256,771 $(70,264) $684,388
========== ======= ======== ======== ======== ========
16 Week Period Ended
June 16, 2001
As Restated -
See Note 2
--------------------
Balance at
beginning
of period 38,347,216 $38,347 $456,470 $326,801 $(72,808) $748,810
Net loss (969) (969)
Other comprehensive
income 6,428 6,428
---------- ------- -------- -------- -------- -------
Balance at end
of period 38,347,216 $38,347 $456,470 $325,832 $(66,380) $754,269
========== ======= ======== ======== ======== ========
Comprehensive Income
--------------------
16 Weeks Ended
---------------------------
(As Restated
See Note 2)
June 15, 2002 June 16, 2001
------------- -------------
Net income (loss) $ 1,875 $ (969)
------- -------
Reclassification adjustment for gains
included in net income (933) -
Foreign currency translation adjustment 7,698 6,428
------- -------
Other comprehensive income 6,765 6,428
------- -------
Total comprehensive income $ 8,640 $ 5,459
======= =======
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
June 15, February 23,
2002 2002
-------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 157,157 $ 168,620
Accounts receivable, net of allowance for
doubtful accounts of
$8,019 and $8,274 at June 15, 2002 and
February 23, 2002, respectively 183,527 206,188
Inventories 722,603 716,083
Prepaid expenses and other current assets 101,645 121,183
--------- --------
Total current assets 1,164,932 1,212,074
--------- ---------
Non-current assets:
Property:
Property owned 1,647,902 1,631,540
Property leased under capital leases 83,725 76,800
--------- ---------
Property - net 1,731,627 1,708,340
Other assets 243,385 273,850
--------- ---------
Total assets $3,139,944 $3,194,264
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,562 $ 526
Current portion of obligations under capital leases 11,987 10,691
Accounts payable 563,921 547,113
Book overdrafts 126,413 127,079
Accrued salaries, wages and benefits 158,230 167,724
Accrued taxes 54,097 69,559
Other accruals 254,213 261,771
--------- -------
Total current liabilities 1,170,423 1,184,463
--------- ---------
Non-current liabilities:
Long-term debt 743,074 779,440
Long-term obligations under capital leases 99,034 93,587
Other non-current liabilities 443,025 463,786
--------- -------
Total liabilities 2,455,556 2,521,276
--------- ---------
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 -
38,511,074 and 38,367,628 shares at
June 15, 2002 and February 23, 2002, respectively 38,511 38,368
Additional paid-in capital 459,370 456,753
Accumulated other comprehensive loss (70,264) (77,029)
Retained earnings 256,771 254,896
--------- -------
Total stockholders' equity 684,388 672,988
--------- ---------
Total liabilities and stockholders' equity $3,139,944 $3,194,264
========== ==========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Cash Flows
(Dollars in thousands)
(Unaudited)
16 Weeks Ended
---------------------------
June 16, 2001
(As Restated
June 15, 2002 See Note 2)
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,875 $ (969)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Asset disposition initiative 6,963 -
Depreciation and amortization 76,906 82,205
Deferred income tax provision 23,643 1,930
Deferred income tax benefit from early
extinguishment of debt (287) -
(Gain) loss on disposal of owned property (4,493) 1,468
Other changes in assets and liabilities:
Decrease in receivables 24,139 3,659
(Increase) decrease in inventories (3,230) 15,128
Decrease (increase) in prepaid expenses and
other current assets 26,431 (7,057)
Decrease in other assets 5,243 8,177
Increase (decrease) in accounts payable 2,835 (14,513)
Decrease in accrued salaries, wages and benefits (10,508) (2,906)
(Decrease) increase in accrued taxes (14,848) 7,249
Increase (decrease) in other accruals 1,288 (12,978)
Decrease in other liabilities (47,029) (7,827)
Other operating activities, net (419) 6,507
------- -------
Net cash provided by operating activities 88,509 80,073
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (88,491) (80,918)
Gain on sale of securities (1,717) -
Proceeds from disposal of property 29,335 33,774
------ -------
Net cash used in investing activities (60,873) (47,144)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt - (5,000)
Proceeds under revolving lines of credit 8,253 267,088
Payments on revolving lines of credit (8,253) (261,108)
Proceeds from long-term borrowings 2,239 460
Payments on long-term borrowings (37,569) (20,789)
Principal payments on capital leases (4,098) (3,628)
(Decrease) increase in book overdrafts (867) 25,401
Deferred financing fees (2,437) (3,368)
Proceeds from stock option exercise 2,760 -
------- -------
Net cash used in financing activities (39,972) (944)
Effect of exchange rate changes on cash and
cash equivalents 873 596
-------- -------
Net (decrease) increase in cash and cash equivalents (11,463) 32,581
Cash and cash equivalents at beginning of period 168,620 131,550
------- -------
Cash and cash equivalents at end of period $157,157 $164,131
======== ========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements of The Great Atlantic &
Pacific Tea Company, Inc. (the "Company") for the 16 weeks ended June 15, 2002
and June 16, 2001 are unaudited and, in the opinion of management, contain all
adjustments that are of a normal and recurring nature necessary to present
fairly the financial position and results of operations for such periods. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in the Company's
2001 Annual Report on Form 10-K. Interim results are not necessarily indicative
of results for a full year.
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries.
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 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 this review, the Company has restated its financial statements
for fiscal 1999, fiscal 2000 and the first, second and third quarters of
fiscal 2001, to adjust for vendor allowances recorded prior to the
accounting period in which earned and improper inventory adjustments, each
in violation of Company policies. The financial statements for the first
quarter of fiscal 2001 include an aggregate after-tax credit of $0.7
million and an after-tax charge of $0.1 million relating to these vendor
allowances and perishable inventory adjustments, respectively. As
summarized immediately below, the Company has concluded that the financial
statements should also be restated to reflect primarily 1) the appropriate
timing for the recognition of vendor allowances received, 2) an
actuarially-based method of estimating self-insurance reserves, and 3) the
timing of recognition of sublet income associated with certain closed
stores.
Vendor Allowances
-----------------
The Company enters into agreements with vendors to receive cash allowances for,
among other things, slotting, purchase volume, advertising, and carrying of new
products. It is appropriate to record these allowances as reductions of the cost
of merchandise sold during the periods in which they are earned. The Company's
previous methodology for recognizing vendor allowances for certain one-year and
multi-year allowance contracts resulted in inappropriate timing of the
recognition of cost reductions. The Company's financial statements have been
adjusted to reflect the effect of proper recognition of such allowances as a
reduction of cost of merchandise sold in the period earned. The after-tax impact
on net loss is a decrease of $4.9 million for the first quarter of fiscal 2001.
Self-Insurance Reserves
-----------------------
The Company's insurance coverages result in significant self-insured risks. The
Company's previous method of establishing its self-insurance reserves was not
based on an appropriate methodology. Accordingly, the Company has adjusted the
financial statements based on actuarially determined estimates. The after-tax
impact on net loss is a decrease of $1.1 million for the first quarter of fiscal
2001.
Closed Store Subleases
----------------------
In recording accruals for closed stores, the Company's previous methodology
resulted, for certain properties, in the recognition of a portion of sublease
amounts in excess of the related obligations. The Company has adjusted the
financial statements to restore such excess to the closed store accruals. Such
methodology had no effect on stores closed as part of the Asset Disposition
Initiative discussed in Note 6 of the Company's Consolidated Financial
Statements. Accordingly, the Company has adjusted the financial statements to
correct the timing of the recognition of subleases. As a result of the
foregoing, the Company has restated its financial statements from amounts
previously reported. The after-tax impact on net loss is an increase of $0.4
million for the first quarter of fiscal 2001.
The following is a summary of the significant effects of the restatement on the
Company's financial statements for the first quarter of fiscal 2001:
As
Previously As
Reported Adjustments Restated
---------- ------------ -----------
First Quarter Ended June 16, 2001
---------------------------------
Statement of Consolidated Operations
Cost of merchandise sold $(2,427,272) $9,412 $(2,417,860)
Gross margin 961,022 9,412 970,434
Store operating, general and
administrative expense (943,480) 2,671 (940,809)
Income from operations 17,542 12,083 29,625
Interest expense (29,060) (1,445) (30,505)
(Loss) income before income taxes (9,676) 10,638 962
Benefit from (provision for) income
taxes 2,537 (4,468) (1,931)
Net loss (7,139) 6,170 (969)
Net loss per share - basic and diluted $(0.19) $ 0.16 $ (0.03)
3. Income Taxes
The income tax provision recorded for the first quarter of fiscal years 2002 and
2001 reflects the Company's estimated expected annual tax rates applied to its
respective domestic and foreign financial results.
The income tax provision recorded for the first quarter of fiscal 2001 reflects
a one-time adjustment relating to an enacted federal tax rate reduction from the
Canadian government. This new legislation which became effective during the
first quarter of fiscal 2001 will reduce the Canadian federal corporate income
tax rate by a total of 7% from 28% to 21% by January 1, 2004. However, income
tax expense for the first quarter of 2001 was increased by $1.2 million to
reflect the reduction in value of the deferred Canadian tax asset (primarily
relating to NOL carryforwards) resulting from the lower rates. Excluding this
adjustment of the deferred tax asset, income tax expense would have been $0.7
million.
During the second quarter of fiscal 2001, the Ontario government enacted
corporate income tax rate changes, gradually reducing the rate from 14% to 8% by
January 1, 2006. This additional Canadian tax rate reduction did not have a
significant impact on the financial statements for the 16 weeks ending June 15,
2002.
4. Wholesale Franchise Business
As of June 15, 2002, the Company served 68 franchised stores. These franchisees
are required to purchase inventory exclusively from the Company, which acts as a
wholesaler to the franchisees. The Company had sales to these franchised stores
of $221 million and $208 million for the first quarter of fiscal years 2002 and
2001, respectively. In addition, the Company subleases the stores and leases the
equipment in the stores to the franchisees. The Company also provides
merchandising, advertising, accounting and other consultative services to the
franchisees for which it receives a fee, which primarily represents the
reimbursement of costs incurred to provide such services.
The Company holds as assets inventory notes collateralized by the inventory in
the stores and equipment lease receivables collateralized by the equipment in
the stores. The current portion of the inventory notes and equipment leases, net
of allowance for doubtful accounts, amounting to approximately $4.7 million and
$2.8 million, are included in accounts receivable at June 15, 2002 and February
23, 2002, respectively. The long-term portion of the inventory notes and
equipment leases amounting to approximately $44.8 million are included in other
assets at both June 15, 2002 and February 23, 2002, 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.
5. 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
the first quarter of fiscal year 2001 was $0.5 million. Had goodwill continued
to be amortized, the Company would have recorded $0.5 million in amortization
expense during the first quarter of fiscal 2002. 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. 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.
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.
The provisions of this statement were required to be adopted by the Company at
the beginning of fiscal 2002. The adoption of this statement did not have a
material impact on the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS 145, "Recission of FASB Statements 4, 44 and
64, Amendment of FASB Statement 13, and Technical Corrections". SFAS 145
rescinds the provisions of SFAS 4 that requires companies to classify certain
gains and losses from debt extinguishments as extraordinary items, eliminates
the provisions of SFAS 44 regarding transition to the Motor Carrier Act of 1980
and amends the provisions of SFAS 13 to require that certain lease modifications
be treated as sale leaseback transactions. The provisions of SFAS 145 related to
classification of debt extinguishment are effective for fiscal years beginning
after May 15, 2002. In future periods, the Company will classify debt
extinguishment costs within income from operations and will reclassify
previously reported debt extinguishments as such. The provisions of SFAS 145
related to lease modification are effective for transactions occurring after May
15, 2002. The Company does not expect the provisions of SFAS 145 related to
lease modification to have a material impact on its financial position or
results of operations.
6. 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 $28.9 million of the
total net severance charges from the time of the original charges through June
15, 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 since the beginning of fiscal 2001:
Severance
Store and
Occupancy Benefits Total
--------- --------- -------
Reserve Balance at Feb. 24, 2001 $82,861 $2,721 $85,582
Addition (1) 3,818 - 3,818
Utilization (2) (23,302) (544) (23,846)
------- ------- -------
Reserve Balance at Feb. 23, 2002 63,377 2,177 65,554
Addition (1) 1,104 - 1,104
Utilization (2) (5,413) (143) (5,556)
------ ------ ------
Reserve Balance at June 15, 2002 $59,068 $2,034 $61,102
======= ====== =======
(1) The additions to store occupancy of $3.8 million and $1.1 million during
fiscal 2001 and the first quarter of fiscal 2002 represent the present value
of accrued interest related to lease obligations.
(2) Store occupancy utilization of $23.3 million and $5.4 million for fiscal
2001 and the first quarter of fiscal 2002 represent lease and other occupancy
payments made during those periods.
At June 15, 2002, approximately $8.5 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 aforementioned stores while they were open during the periods presented.
The operating results of these stores are as follows:
16 Weeks Ended
---------------------
June 15, June 16,
2002 2001
--------- ---------
Sales $ - $ 181
========= =========
Operating loss $ - $ (46)
========= =========
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) and $7.0
million pretax ($4.1 million after tax) was included in the Statements of
Consolidated Operations for fiscal 2001 and the first quarter of fiscal 2002,
respectively.
Of the net pretax charge of $193.5 million incurred in fiscal 2001, $3.9 million
was included in "Cost of merchandise sold" in the Statements of Consolidated
Operations and was comprised of inventory markdowns, and $189.6 million was
included in "Store operating, general and administrative expense" in the
Statements of Consolidated Operations for fiscal 2001 and consisted of future
vacancy costs, severance and fixed asset write-downs.
Of the net pretax charge of $7.0 million incurred during the first quarter of
fiscal 2002, $0.9 million was included in "Cost of merchandise sold" in the
Statements of Consolidated Operations and was comprised of inventory markdowns,
and $6.1 million was included in "Store operating, general and administrative
expense" in the Statements of Consolidated Operations of which $3.6 million was
severance and $2.5 million was closing costs.
To the extent fixed assets included in the items noted above could be used in
other continuing operations, the Company has or 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 other charges related to the plan that were not accounted for in this
reserve because they were expensed as incurred. 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. 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. Included in the $7.0 million net charges recorded
during the first quarter of fiscal 2002, there were similar items that were not
accounted for in this reserve because they were expensed as incurred. These
costs amounted to $3.5 million, which were primarily related to non-accruable
closing costs and inventory markdowns. These costs for both periods discussed
are excluded from the table below which represents only the reserve recorded on
the balance sheet.
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
Addition (1) 1,475 3,544 - 5,019
Utilization (2) (10,281) (11,045) - (21,326)
-------- -------- -------- --------
Reserve Balance at
June 16, 2002 $ 71,517 $ 12,459 $ - $ 83,976
======== ======== ======== ========
(1) The additions to occupancy of $1.7 million and $1.5 million during fiscal
2001 and the first quarter of fiscal 2002 represent the present value of
accrued interest related to lease obligations.
(2) Occupancy utilization of $1.8 million and $10.3 million during fiscal 2001
and the first quarter of fiscal 2002 represents vacancy related payments
for closed locations. Severance utilization of $2.9 million and $11.0
million during fiscal 2001 and the first quarter of fiscal 2002 represents
payments made to terminated employees during the period. Goodwill/fixed
asset utilization of $81.5 million during fiscal 2001 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, during fiscal
2001, 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.
As of June 15, 2002, the Company paid approximately $13.9 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 June 15, 2002, approximately $24.4 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 the first quarters of
fiscal 2001 and 2000 are the sales and operating results of the 39 stores that
were identified for closure as part of this asset disposition initiative while
they were open during the periods presented. The results of these operations are
as follows:
16 Weeks Ended
------------------------
June 15, June 16,
2002 2001
---------- -----------
Sales $ 19,096 $ 97,813
========== ==========
Operating loss $ (1,337) $ (7,950)
========== ==========
As of June 15, 2002, the Company had closed 35 of the aforementioned stores.
Based upon current available information, Management evaluated the reserve
balances as of June 15, 2002 of $61.1 million for the 1998 phase of the asset
disposition initiative and $84.0 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.
7. Operating Segments
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company's chief operating decision maker is the Chief
Executive Officer.
The Company currently operates in three reportable segments: United States
Retail, Canada Retail and Canada Wholesale. The retail segments are comprised of
retail supermarkets in the United States and Canada, while the wholesale segment
is comprised of the Company's Canadian operation that serves as the exclusive
wholesaler to the Company's franchised stores and serves as wholesaler to
certain third party retailers.
The accounting policies for the segments are the same as those described in the
summary of significant accounting policies included in the Company's Fiscal 2001
Annual Report. The Company measures segment performance based upon income
from operations.
Interim information on segments is as follows:
16 Weeks Ended
---------------------------
(Dollars in thousands) June 15, June 16,
2002 2001
------------ ------------
Sales
U.S. Retail $ 2,513,178 $ 2,629,928
Canada Retail 572,884 550,577
Canada Wholesale 221,176 207,789
------------ ------------
Total Company $ 3,307,238 $ 3,388,294
============ ============
Depreciation and amortization
U.S. Retail $ 65,030 $ 71,660
Canada Retail 11,876 10,545
Canada Wholesale - -
------------ ------------
Total Company $ 76,906 $ 82,205
============ ============
Income from operations
U.S. Retail $ 6,413 $ 15,751
Canada Retail 11,502 6,037
Canada Wholesale 9,856 7,837
------------ ------------
Total Company $ 27,771 $ 29,625
============ ============
(Loss) income before income taxes and extraordinary item
U.S. Retail $ (17,180) $ (11,101)
Canada Retail 10,011 3,918
Canada Wholesale 10,147 8,145
------------ ------------
Total Company $ 2,978 $ 962
============ ============
Capital expenditures
U.S. Retail $ 69,354 $ 62,655
Canada Retail 19,137 18,263
Canada Wholesale - -
------------ ------------
Total Company $ 88,491 $ 80,918
============ ============
June 15, February 23,
2002 2002
------------ ------------
Total assets
U.S. Retail $ 2,515,641 $ 2,599,628
Canada Retail 548,167 521,278
Canada Wholesale 76,136 73,358
------------ ------------
Total Company $ 3,139,944 $ 3,194,264
============ ============
8. 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. During the first quarter
of fiscal 2002, the Company sold its remaining holdings in this common stock and
recognized a gain of $1.7 million. This gain was included in "Store operating,
general and administrative expense" on the Company's Statements of Consolidated
Operations for the 16 weeks ended June 15, 2002.
9. 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, June 26, 2002 and July 18, 2002, three 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.), Davis v.
The Great Atlantic & Pacific Tea Co., Inc., et. al., Civ. Action No. 02-3059
(WGB) (D.N.J.) and Aurelien v. The Great Atlantic & Pacific Tea Co., Inc., et
al., Civ. Action No. 02-3442 (FSH) (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 July 17, 2002, the United States District Court for the
District of New Jersey, upon motion by the plaintiff, dismissed the Davis Class
Action Lawsuit, without prejudice and without costs against any party. The
defendants have not yet responded to the Complaints filed in the Class Action
Lawsuits.
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. Barline, 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. The defendants have not yet responded to the
Complaint filed in the Osher Lawsuit.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
16 WEEKS ENDED JUNE 15, 2002 COMPARED TO THE 16 WEEKS ENDED JUNE 16, 2001
-------------------------------------------------------------------------
OVERALL
-------
Sales for the first quarter of fiscal 2002 were $3.3 billion, compared with $3.4
billion in the first quarter of fiscal 2001; comparable store sales increased
0.2%. Net income per share for the first quarter of fiscal 2002 was $0.05
compared to a net loss per share of $0.03 for the first quarter of fiscal 2001.
Included in the Company's results for the first quarter of fiscal 2002 was an
extraordinary after tax charge of $0.4 million or $0.01 per share for the cost
of repurchasing $37.7 million of its 7.75% Notes due April 15, 2007, a $7.0
million charge ($4.1 million after tax or $0.10 per share - diluted) relating to
its asset disposition initiative (see Note 6 of the Company's Consolidated
Financial Statements), and a nonrecurring pretax gain of $1.7 million ($1.0
million after tax or $0.03 per share) from proceeds received as a result of the
sale of securities received as part of the demutualization of The Prudential
Insurance Company (see Note 8 of the Company's Consolidated Financial
Statements).
The following schedule details the adjustments from "as reported" to "as
adjusted" results for the first quarter of fiscal 2002:
Adjustments to be (added)
subtracted
--------------------------
First First
First Asset Quarter Quarter
Quarter dispos- Extra- Gain on 2002 2001
2002 ition ordin- sale of results results
results as initia- ary common as As
(In Millions) reported tive loss stock adjusted restated*
--------- ------ ----- ------- -------- --------
Sales $3,307.2 $ - $ - $ - $3,307.2 $3,388.3
Cost of
merchandise sold (2,359.7) (0.9) - - (2,358.8) (2,417.9)
-------- ----- --- ----- -------- -------
Gross margin 947.5 (0.9) - - 948.4 970.4
Rate to sales 28.65% 28.68% 28.64%
Store operating,
general and
administrative
expense (919.8) (6.1) - 1.7 (915.4) (940.8)
Rate to sales 27.81% 27.68% 27.77%
------- ----- --- ---- ------- ------
Income (loss) from
operations 27.7 (7.0) - 1.7 33.0 29.6
Interest expense (26.7) - - - (26.7) (30.5)
Interest income 2.0 - - - 2.0 1.8
----- ---- --- ----- ------- -------
Income (loss) before
income taxes and
extraordinary item 3.0 (7.0) - 1.7 8.3 0.9
(Provision for) benefit
from income taxes (0.7) 2.9 - (0.7) (2.9) (1.9)
----- ---- --- ---- ------ ------
Net income (loss)
before
extraordinary item 2.3 (4.1) - 1.0 5.4 (1.0)
Extraordinary loss on
early extinguishment
of debt, net of
income tax
benefit of $0.3 (0.4) - (0.4) - - -
----- ---- ----- --- ------ ------
Net income (loss) $ 1.9 $(4.1) $(0.4) $1.0 $ 5.4 $ (1.0)
===== ===== ====== ==== ===== ======
* See Note 2 - Restatement of Previously Issued Financial Statements in the
Company's Consolidated Financial Statement.
SALES
-----
Sales for the first quarter of fiscal 2002 of $3,307 million decreased $81
million or 2.4% from sales of $3,388 million for the first quarter of fiscal
2001. The lower sales were due to a decrease in retail sales of $94 million
offset by an increase in wholesale sales of $13 million. The decrease in retail
sales was attributable to the closure of 91 stores since the beginning of fiscal
2001, of which 19 were closed in fiscal 2002, which decreased sales by $152
million. Included in the 91 stores closed since the beginning of fiscal 2001
were 35 stores closed as part of the asset disposition initiative. Additionally,
the unfavorable effect of the Canadian exchange rate decreased sales by $8
million. This decrease was partially offset by the opening of 30 new stores
since the beginning of fiscal 2001, of which 9 were opened in fiscal 2002,
increasing sales by $61 million. This was additionally offset by increased
comparable store sales, which include replacement stores, for the first quarter
of fiscal 2002 of 0.2% (down 1.0% in the U.S. and up 5.6% in Canada) when
compared to the first quarter of fiscal 2001. The increase in wholesale sales
was attributable to higher sales volume of $16 million partially offset by the
unfavorable effect of the Canadian exchange rate which decreased sales by $3
million.
Sales in the U.S. for the first quarter of fiscal 2002 decreased by $117 million
or 4.4% compared to the first quarter of fiscal 2001. Sales in Canada for the
first quarter of fiscal 2002 increased by $36 million or 4.7% from the first
quarter of fiscal 2001.
Average weekly sales per supermarket were approximately $285,200 for the first
quarter of fiscal 2002 versus $272,800 for the corresponding period of the prior
year, an increase of 4.5%. This increase was primarily due to the closure of
stores with lower average weekly sales.
GROSS MARGIN
------------
Gross margin as a percentage of sales increased 1 basis point to 28.65% for the
first quarter of fiscal 2002 from 28.64% for the first quarter of fiscal 2001.
The gross margin dollar decrease of $23 million resulted from decreases in sales
volume, the gross margin rate and the Canadian exchange rate. The U.S.
operations gross margin decrease of $30 million resulted from a decrease of $36
million due to lower sales volume offset by an increase of $6 million due to a
higher gross margin rate. The Canadian operations gross margin increase of $7
million resulted from an increase of $10 million due to higher sales volume
partially offset by decreases of $1 million due to a lower gross margin rate and
$2 million from fluctuations in the Canadian exchange rate.
Included in gross margin for the first quarter of fiscal 2002 were costs related
to the Company's asset disposition initiative of $0.9 million which were
incurred to mark down inventory in stores announced for closure. Excluding this
charge, as a percentage of sales, the gross margin rate would have been 28.68%
for the first quarter of fiscal 2002. Gross margin for the first quarter ended
June 16, 2001 included costs of $4.5 million incurred as part of the Company's
business process initiative. These costs were incurred to mark down inventory to
be discontinued as a result of detailed category management studies.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
---------------------------------------------------
Store operating, general and administrative expense ("SG&A") was $920 million
for the first quarter of fiscal 2002 compared to $941 million for the first
quarter of fiscal 2001. As a percentage of sales, SG&A was 27.81% for the first
quarter of fiscal 2002 compared to 27.77% for the first quarter of fiscal 2001.
Included in SG&A for the first quarter of fiscal 2002 were costs relating to the
Company's asset disposition initiative of $6.1 million as described in Note 6 of
the Consolidated Financial Statements. Also included in SG&A for the first
quarter of fiscal 2002 was a gain of $1.7 million related to the sale of
securities received as part of the demutualization of the Prudential Insurance
Company as described in Note 8 of the Consolidated Financial Statements.
Excluding these items, SG&A was $915 million or 27.68% for the first quarter of
fiscal 2002 compared to $941 million or 27.77% for the first quarter of fiscal
2001. This decrease of 9 basis points was primarily due to higher labor costs
offset by gains on the sale of property and equipment and lower costs related to
utilities.
Included in SG&A for the first quarters of fiscal 2002 and fiscal 2001 were $20
million and $27 million, respectively, 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.
INTEREST EXPENSE
----------------
Interest expense of $27 million for the first quarter of fiscal 2002 decreased
from the prior year amount of $31 million. This was due to decreased borrowing
requirements during the first quarter of fiscal 2002 compared to the first
quarter of fiscal 2001 as a result of lower capital expenditures, a reduction in
working capital, the proceeds received on the sale leaseback transactions
described in Note 14 of the Consolidated Financial Statements in the Company's
Annual Report on Form 10-K, and the proceeds received as a result of the
demutualization of the Prudential Insurance Company as described in Note 8 of
the Company's Consolidated Financial Statements filed herein.
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 $28.9 million of the
total net severance charges from the time of the original charges through June
15, 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.
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) and $7.0
million pretax ($4.1 million after tax) was included in the Statements of
Consolidated Operations for fiscal 2001 and the first quarter of fiscal 2002,
respectively.
Of the net pretax charge of $193.5 million incurred in fiscal 2001, $3.9 million
was included in "Cost of merchandise sold" in the Statements of Consolidated
Operations and was comprised of inventory markdowns, and $189.6 million was
included in "Store operating, general and administrative expense" in the
Statements of Consolidated Operations for fiscal 2001 and consisted of future
vacancy costs, severance and fixed asset write-downs.
Of the net pretax charge of $7.0 million incurred during the first quarter of
fiscal 2002, $0.9 million was included in "Cost of merchandise sold" in the
Statements of Consolidated Operations and was comprised of inventory markdowns,
and $6.1 million was included in "Store operating, general and administrative
expense" in the Statements of Consolidated Operations of which $3.6 million was
severance and $2.5 million was closing costs.
To the extent fixed assets included in the items noted above could be used in
other continuing operations, the Company has or 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.
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, during fiscal 2001, 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.
As of June 15, 2002, the Company paid approximately $13.9 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.
As of June 15, 2002, the Company had closed 35 of the aforementioned stores.
Based upon current available information, Management evaluated the reserve
balances as of June 15, 2002 of $61.1 million for the 1998 phase of the asset
disposition initiative and $84.0 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.
Liquidity and Capital Resources
-------------------------------
The Company had negative working capital of $5 million at June 15, 2002 compared
to positive working capital of $28 million at February 23, 2002. The Company had
cash and cash equivalents aggregating $157 million at June 15, 2002 compared to
$169 million at the end of fiscal 2001. The decrease in working capital was
attributable primarily to decreases in cash and cash equivalents, accounts
receivable and prepaid expenses and other current assets and an increase in
accounts payable partially offset by an increase in inventories and decreases in
accrued salaries, wages and benefits, accrued taxes and other accruals.
At June 15, 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$131 million at June 15, 2002). As of June 15, 2002, the Company had
no borrowings under the Secured Credit Agreement. Accordingly, as of June 15,
2002, after reducing availability for outstanding letters of credit and
inventory requirements, the Company would have had $288 million available under
the Secured Credit Agreement had it been in compliance with its reporting
covenant as described below. 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 June 15, 2002, except as
described in the next paragraph, 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, beginning
on May 25, 2002, 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
filing of the Company's Annual Report on Form 10-K on July 5, 2002 cured said
covenant violation. The filing delay also caused a covenant violation under the
indenture covering the Company's debt. Such violation was also cured upon
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 June 15, 2002 at terms determined by market conditions at the
time of sale.
During the first quarter of fiscal 2002, the Company funded its capital
expenditures and debt repayments through internally generated funds combined
with proceeds from disposals of property. Capital expenditures totaled $88.5
million during the first quarter of fiscal 2002, which included 9 new
supermarkets, 7 major remodels or enlargements and capital expenditures related
to the business process initiative.
For the remainder of fiscal 2002, the Company has planned capital expenditures
of approximately $210 million. These expenditures relate primarily to opening 16
new supermarkets, enlarging or remodeling 60 - 65 supermarkets, and capital
purchases associated with the Company's business process initiative. The Company
currently expects to close a total of approximately 10 - 15 stores during the
remainder of fiscal 2002.
The Company does not expect to pay dividends in the foreseeable future.
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 June 15, 2002. 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 for the next twelve months. However,
certain external factors such as unfavorable economic conditions, competition,
labor relations, and fuel and utility costs could have a significant impact on
cash generated from operations.
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 $739 million in notes as of June 15, 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. Since the Company has borrowed minimal amounts under
these facilities during the first quarter of fiscal 2002, a presumed 1% change
in LIBOR would not have had a material impact on interest expense.
The Company has entered into three interest rate swaps with commercial banks
with an aggregate notional amount of $150 million, all maturing on April 15,
2007. These hedging agreements were designated as fair value hedging instruments
and effectively convert 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 these hedging agreements. At June 15, 2002, these
hedging agreements had a fair value of $3.2 million that was recorded as an
asset on the Company's Consolidated Balance Sheets. A presumed 1% change in
LIBOR during the time the hedging agreements were outstanding during fiscal 2002
would not have had a material impact on borrowing costs.
Foreign Exchange Risk
---------------------
The Company is exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. During the first quarter of fiscal 2002, a
change in the Canadian currency of 10% would have resulted in a fluctuation in
net income of $1.2 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.
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.
Insurance
---------
The Consolidated Balance Sheets include liabilities with respect to self-insured
workers' compensation and general liability claims. The Company determines the
required liability of such claims on a discounted basis, utilizing an
actuarially determined 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. It is
possible that the final resolution of some of these claims may vary from the
Company's estimate of existing reserves.
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.
Store Closing Reserves
----------------------
For stores to be closed that are under long-term leases, the Company records a
liability for the future minimum lease payments and related costs from the date
of closure to the end of the remaining lease term, net of estimated cost
recoveries. The Company estimates future net cash flows based on its experience
and knowledge of the market in which the store expected to be closed 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.
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.
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.
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings
On January 13, 2000, the Attorney General of the State of New York filed an
action in New York Supreme Court, County of New York, alleging that 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, June 26, 2002 and July 18, 2002, three 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.), Davis v.
The Great Atlantic & Pacific Tea Co., Inc., et. al., Civ. Action No. 02-3059
(WGB) (D.N.J.) and Aurelien v. The Great Atlantic & Pacific Tea Co., Inc., et
al., Civ. Action No. 02-3442 (FSH) (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 July 17, 2002, the United States District Court for the
District of New Jersey, upon motion by the plaintiff, dismissed the Davis Class
Action Lawsuit, without prejudice and without costs against any party. The
defendants have not yet responded to the Complaints filed in the Class Action
Lawsuits.
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. Barline, 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. The defendants have not yet responded to the
Complaint filed in the Osher Lawsuit.
ITEM 2 - Changes in Securities
None
ITEM 3 - Defaults Upon Senior Securities
None
ITEM 4 - Submission of Matters to a Vote of Security Holders
None
ITEM 5 - Other Information
None
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION
---------- -----------
3.1 Articles of Incorporation of The Great Atlantic & Pacific
Tea Company, as amended through July 1987 (incorporated
herein by reference to Exhibit 3(a) to Form 10-K filed
on May 27, 1988)
3.2 By-Laws of The Great Atlantic & Pacific Tea Company, Inc.,
as amended through July 2, 2002
4.1 Indenture, dated as of January 1, 1991 between the Company
and JPMorgan Chase Bank (formerly The Chase Manhattan Bank
as successor by merger to Manufacturers Hanover Trust
Company), as trustee (the "Indenture") (incorporated herein
by reference to Exhibit 4.1 to Form 8-K)
4.2 First Supplemental Indenture, dated as of December 4, 2001,
to the Indenture, dated as of January 1, 1991 between the
Company and JPMorgan Chase Bank, relating to the 7.70%
Senior Notes due 2004 (incorporated herein by reference to
Exhibit 4.1 to Form 8-K filed on December 4, 2001)
4.3 Second Supplemental Indenture, dated as of December 20,
2001, to the Indenture between the Company and JPMorgan
Chase Bank, relating to the 9 1/8% Senior Notes due 2011
(incorporated herein by reference to Exhibit 4.1 to Form
8-K filed on December 20, 2001)
+ Agreements with respect to long-term debt where the total amount of securities
authorized thereunder does not exceed 10% of the total assets of the Registrant
and its subsidiaries on a consolidated basis shall be furnished to the
Commission on request.
10.1 Not Applicable
10.2 Employment Agreement, made and entered into as of the 8th
day of January, 2001, by and between the Company and
Elizabeth R. Culligan (incorporated herein by reference to
Exhibit 10 to Form 10-Q filed on January 16, 2001)
("Culligan Agreement")
10.3 Amendment to Culligan Agreement dated April 8, 2002
(incorporated herein by reference to Exhibit 10.3 to Form
10-K filed on July 5, 2002)
10.4 Employment Agreement dated December 6, 1994, between the
Company and Fred Corrado (incorporated herein by reference
to Exhibit 10 to Form 10-K filed on May 24, 1995)
10.5 Amendment to Fred Corrado Employment Agreement dated
February 22, 2002 (incorporated herein by reference to
Exhibit 10.5 to Form 10-K filed on July 5, 2002)
10.6 Employment Agreement, made and entered into as of the 1st
day of November, 2000, by and between the Company and
William P. Costantini (incorporated herein by reference to
Exhibit 10 to Form 10-Q filed on January 16, 2001)
("Costantini Agreement")
10.7 Amendment to Costantini Agreement dated April 30, 2002
(incorporated herein by reference to Exhibit 10.7 to Form
10-K filed on July 5, 2002)
10.8 Employment Agreement, made and entered into as of the 24th
day of February, 2002, by and between the Company and
Mitchell P. Goldstein (incorporated herein by reference to
Exhibit 10.8 to Form 10-K filed on July 5, 2002)
10.9 Employment Agreement, made and entered into as of the 1st
day of November, 2000, by and between the Company and
Nicholas Ioli, Jr. (incorporated herein by reference to
Exhibit 10 to Form 10-Q filed on January 16, 2001)
10.10 Amendment to Nicholas Ioli Employment Agreement dated April
3, 2002 (incorporated herein by reference to Exhibit 10.10
to Form 10-K filed on July 5, 2002)
10.11 Employment Agreement, made and entered into as of the 1st
day of November, 2000, by and between the Company and
Laurane Magliari (incorporated herein by reference to
Exhibit 10 to Form 10-Q filed on January 16, 2001)
("Magliari Agreement")
10.12 Amendment to Magliari Agreement dated April 30, 2002
(incorporated herein by reference to Exhibit 10.12 to Form
10-K filed on July 5, 2002)
10.13 Employment Agreement, made and entered into as of the 14th
day of May, 2001, by and between the Company and John E.
Metzger ("Metzger Agreement") as amended February 14, 2002
(incorporated herein by reference to Exhibit 10.13 to Form
10-K filed on July 5, 2002)
10.14 Employment Agreement, made and entered into as of the 25th
day of February, 2002 by and between the Company and David
A. Smithies (incorporated herein by reference to Exhibit
10.14 to Form 10-K filed on July 5, 2002)
10.15 Supplemental Executive Retirement Plan effective as of
September 30, 1991 (incorporated herein by reference to
Exhibit 10.B to Form 10-K filed on May 28, 1993)
10.16 Supplemental Executive Retirement Plan effective as of
September 1, 1997 (incorporated herein by reference to
Exhibit 10.B to Form 10-K filed on May 27, 1998)
10.17 Supplemental Retirement and Benefit Restoration Plan
effective as of January 1, 2001 (incorporated herein by
reference to Exhibit 10(j) to Form 10-K filed on May 23,
2001)
10.18 1994 Stock Option Plan (incorporated herein by reference
to Exhibit 10(e) to Form 10-K filed on May 24, 1995)
10.19 1994 Stock Option Plan for Non-Employee Directors
(incorporated herein by reference to Exhibit 10(f) to Form
10-K filed on May 24, 1995)
10.20 Directors' Deferred Payment Plan adopted May 1, 1996
(incorporated herein by reference to Exhibit 10(h) to Form
10-K filed on May 16, 1997)
10.21 1998 Long Term Incentive and Share Award Plan (incorporated
herein by reference to Exhibit 10(k) to Form 10-K filed on
May 19, 1999)
10.22 Credit Agreement dated as of February 23, 2001, among the
Company, The Great Atlantic & Pacific Company of Canada,
Limited and the other Borrowers party hereto and the
Lenders party hereto, The Chase Manhattan Bank, as U.S.
Administrative Agent, and The Chase Manhattan Bank of
Canada, as Canadian Administrative Agent ("Credit
Agreement") (incorporated herein by reference to Exhibit 10
to Form 10-K filed on May 23, 2001)
10.23 Amendment No. 1 and Waiver, dated as of November 16, 2001
to Credit Agreement (incorporated herein by reference to
Exhibit 10.23 to Form 10-K filed on July 5, 2002)
10.24 Amendment No. 2 dated as of March 21, 2002 to Credit
Agreement (incorporated herein by reference to Exhibit
10.24 to Form 10-K filed on July 5, 2002)
10.25 Amendment No. 3 dated as of April 23, 2002 to Credit
Agreement (incorporated herein by reference to Exhibit
10.25 to Form 10-K filed on July 5, 2002)
10.26 Waiver dated as of June 14, 2002 to Credit Agreement
(incorporated herein by reference to Exhibit 10.26 to Form
10-K filed on July 5, 2002)
11 Not Applicable
12 Not Applicable
13 2001 Annual Report to Stockholders (incorporated herein by
reference to Exhibit 13 to Form 10-K filed on July 5, 2002)
16 Not applicable
18 Not Applicable
21 Subsidiaries of Registrant (incorporated herein by
reference to Exhibit 21 to Form 10-K filed on July 5, 2002)
22 Not Applicable
23 Independent Auditors' Consent (incorporated herein by
reference to Exhibit 23 to Form 10-K filed on July 5, 2002)
24 Not Applicable
99 Not Applicable
(b) Reports on Form 8-K
On June 19, 2002, the Company filed a report on Form 8-K containing a press
release regarding the Company's expectation that it would complete its review of
the accounting issues identified in the Company's May 24, 2002 announcement and
file its annual report with the Securities and Exchange Commission no later than
July 3, 2002. The Company also said that it had obtained a waiver from its
lenders granting it the ability to borrow up to $50 million under its credit
facility until July 29, 2002.
On February 27, 2002, the Company filed a report on Form 8-K disclosing that it
had received cash and common stock totaling $60.6 million from the
demutualization of a mutual insurance company.
The Great Atlantic & Pacific Tea Company, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
Dated: July 30, 2002 By: /s/ Brenda M. Galgano
------------------------------
Brenda M. Galgano, Vice President, Corporate
Controller (Chief Accounting Officer)
CERTIFICATION
Each of the undersigned hereby certifies in his capacity as an officer of The
Great Atlantic & Pacific Tea Company, Inc. (the "Company") that the Quarterly
Report of the Company on Form 10-Q for the period ended June 15, 2002 fully
complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and that the information contained in such report fairly presents, in
all material respects, the financial condition of the Company at the end of such
period and the results of operations of the Company for such period.
Dated: July 30, 2002
/s/Christian W.E. Haub
----------------------
Chairman of the Board,
Chief Executive Officer
/s/Mitchell P. Goldstein
------------------------
Senior Vice President,
Chief Financial Officer