-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U01ppgJUF4HJRhOjIGiuyBo2w0dEZ9W1sH7pGPsgCxAzRGJvw5mb699C5a6v78dv kecM1vUrqqP18Uus+SRFEQ== 0000043300-03-000036.txt : 20031017 0000043300-03-000036.hdr.sgml : 20031017 20031016184530 ACCESSION NUMBER: 0000043300-03-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030906 FILED AS OF DATE: 20031017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT ATLANTIC & PACIFIC TEA CO INC CENTRAL INDEX KEY: 0000043300 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 131890974 STATE OF INCORPORATION: MD FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04141 FILM NUMBER: 03944663 BUSINESS ADDRESS: STREET 1: 2 PARAGON DR CITY: MONTVALE STATE: NJ ZIP: 07645 BUSINESS PHONE: 2015739700 MAIL ADDRESS: STREET 1: 2 PARAGON DRIVE CITY: MONTVALE STATE: NJ ZIP: 07645 10-Q 1 f10q203.txt FORM 10-Q, SEPTEMBER 6, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Mark One [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 6, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 1-4141 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. -------------------------------------------------- (Exact name of registrant as specified in charter) Maryland 13-1890974 - --------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2 Paragon Drive Montvale, New Jersey 07645 ---------------------------------------- (Address of principal executive offices) (201) 573-9700 Registrant's telephone number, including area code Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of September 8, 2003 the Registrant had a total of 38,517,218 shares of common stock - $1 par value outstanding. PART I - FINANCIAL INFORMATION ITEM 1 - Financial Statements The Great Atlantic & Pacific Tea Company, Inc. Statements of Consolidated Operations (Dollars in thousands, except share and per share amounts) (Unaudited)
12 Weeks Ended 28 Weeks Ended -------------------------------------- ------------------------------------- Sept. 6, 2003 Sept. 7, 2002 Sept. 6, 2003 Sept. 7, 2002 ------------------ ------------------ ------------------ ----------------- Sales $ 2,443,700 $ 2,327,182 $ 5,647,530 $ 5,420,958 Cost of merchandise sold (1,784,774) (1,667,850) (4,109,435) (3,879,811) ------------ -------------- -------------- ------------- Gross margin 658,926 659,332 1,538,095 1,541,147 Store operating, general and administrative expense (679,839) (666,939) (1,571,467) (1,523,540) ------------ -------------- --------------- ------------- (Loss) income from operations (20,913) (7,607) (33,372) 17,607 Interest expense (17,945) (19,640) (42,829) (46,392) Interest income 1,773 3,105 3,912 5,064 ------------ -------------- -------------- ------------- Loss from continuing operations before income taxes (37,085) (24,142) (72,289) (23,721) Provision for income taxes (20,010) (123,119) (5,148) (122,751) ------------ --------------- --------------- ------------- Loss from continuing operations (57,095) (147,261) (77,437) (146,472) Discontinued operations (Note 2): (Loss) income from operations of discontinued businesses, net of tax (21,750) 2,577 (33,209) 3,663 (Loss) gain on disposal of discontinued operations, net of tax (4,845) - 47,236 - -------------- -------------- -------------- ------------- (Loss) income from discontinued operations (26,595) 2,577 14,027 3,663 ------------- -------------- -------------- ------------- Net loss $ (83,690) $ (144,684) $ (63,410) $ (142,809) ============ ============== ============== ============= Net (loss) income per share - basic and diluted: Continuing operations $ (1.48) $ (3.82) $ (2.01) $ (3.81) Discontinued operations (0.69) 0.06 0.36 0.10 ------------- --------------- ------------- ------------- Net loss per share - basic and diluted $ (2.17) $ (3.76) $ (1.65) $ (3.71) ============ ============== ============== ============= Weighted average number of common shares outstanding 38,516,670 38,512,439 38,516,176 38,476,818 Common stock equivalents 635,554 422,850 392,570 776,986 ------------- -------------- -------------- ------------- Weighted average number of common and common equivalent shares outstanding 39,152,224 38,935,289 38,908,746 39,253,804 ============= ============== ============== ============= See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc Statements of Consolidated Stockholders' Equity and Comprehensive Income (Dollars in thousands, except share and per share amounts) (Unaudited)
Accumulated Common Stock Additional Other Total ----------------------------- Paid-in Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit (Loss)/Income Equity -------------- ------------- ------------- ------------- ----------------- --------------- 28 Week Period Ended September 6, 2003 - -------------------- Balance at beginning of period 38,515,806 $ 38,516 $ 459,411 $ 61,387 $ (61,123) $ 498,191 Net loss (63,410) (63,410) Other comprehensive income 27,692 27,692 Stock options exercised 1,412 1 11 12 ------------ ----------- ----------- ----------- ----------- ----------- Balance at end of period 38,517,218 $ 38,517 $ 459,422 $ (2,023) $ (33,431) $ 462,485 ============ =========== =========== ============ =========== =========== Accumulated Common Stock Additional Other Total ----------------------------- Paid-in Retained Comprehensive Stockholders' Shares Amount Capital Earnings (Loss)/Income Equity -------------- ------------- ------------- ------------- ----------------- --------------- 28 Week Period Ended September 7, 2002 - -------------------- Balance at beginning of period 38,367,628 $ 38,368 $ 456,753 $ 254,896 $ (77,029) $ 672,988 Net loss (142,809) (142,809) Other comprehensive income 4,138 4,138 Stock options exercised 148,178 148 2,658 2,806 ------------ ----------- ----------- ----------- ----------- ----------- Balance at end of period 38,515,806 $ 38,516 $ 459,411 $ 112,087 $ (72,891) $ 537,123 ============ =========== =========== =========== =========== =========== Comprehensive Income - -------------------- 12 Weeks Ended 28 Weeks Ended -------------------------------------- ------------------------------------- Sept. 6, 2003 Sept. 7, 2002 Sept. 6, 2003 Sept. 7, 2002 ------------------ ------------------ ------------------ ----------------- Net loss $ (83,690) $ (144,684) $ (63,410) $ (142,809) ----------- ----------- ----------- ----------- Foreign currency translation adjustment (9,722) (2,475) 30,359 5,223 Reclassification adjustment for gains included in net loss, net of tax - - - (933) Net unrealized loss on derivatives, net of tax (1,960) (152) (2,667) (152) ------------ ------------ ------------ ----------- Other comprehensive (loss) income (11,682) (2,627) 27,692 4,138 ----------- ----------- ----------- ----------- Total comprehensive loss $ (95,372) $ (147,311) $ (35,718) $ (138,671) =========== =========== =========== ===========
See Notes to Quarterly Report The Great Atlantic & Pacific Tea Company, Inc. Consolidated Balance Sheets (Dollars in thousands except share amounts)
September 6, February 22, 2003 2003 -------------------- -------------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 182,607 $ 199,014 Accounts receivable, net of allowance for doubtful accounts of $12,489 and $9,799 at September 6, 2003 and February 22, 2003, respectively 198,018 185,411 Inventories 678,704 682,734 Prepaid expenses and other current assets 43,860 32,429 ------------- -------------- Total current assets 1,103,189 1,099,588 ------------- -------------- Non-current assets: Property: Property owned 1,461,347 1,538,117 Property leased under capital leases 70,067 71,806 ------------- -------------- Property - net 1,531,414 1,609,923 Other assets 170,271 175,726 ------------- -------------- Total assets $ 2,804,874 $ 2,885,237 ============= ============== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 24,638 $ 25,820 Current portion of obligations under capital leases 15,190 13,787 Accounts payable 547,966 511,634 Book overdrafts 118,026 101,817 Accrued salaries, wages and benefits 186,007 180,812 Accrued taxes 78,803 53,774 Other accruals 215,540 202,968 ------------- -------------- Total current liabilities 1,186,170 1,090,612 ------------- -------------- Non-current liabilities: Long-term debt 683,051 803,277 Long-term obligations under capital leases 80,286 83,485 Other non-current liabilities 392,882 409,672 ------------- -------------- Total liabilities 2,342,389 2,387,046 ------------- -------------- Commitments and contingencies Stockholders' equity: Preferred stock--no par value; authorized - 3,000,000 shares; issued - none - - Common stock--$1 par value; authorized - 80,000,000 shares; issued and outstanding - 38,517,218 and 38,515,806 shares at September 6, 2003 and February 22, 2003, respectively 38,517 38,516 Additional paid-in capital 459,422 459,411 Accumulated other comprehensive loss (33,431) (61,123) (Accumulated deficit) retained earnings (2,023) 61,387 -------------- -------------- Total stockholders' equity 462,485 498,191 ------------- -------------- Total liabilities and stockholders' equity $ 2,804,874 $ 2,885,237 ============= ==============
See Notes to Quarterly Report The Great Atlantic & Pacific Tea Company, Inc. Statements of Consolidated Cash Flows (Dollars in thousands) (Unaudited)
28 Weeks Ended ------------------------------------------ Sept. 6, 2003 Sept. 7, 2002 -------------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (63,410) $ (142,809) Income from discontinued operations (14,027) (3,663) ------------ ------------ Loss from continuing operations (77,437) (146,472) ------------ ------------ Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities: Restructuring charge (5,230) 8,266 Depreciation and amortization 147,243 138,750 Realized gain on sale of securities - (1,717) Deferred income tax (benefit) provision (5,496) 146,709 Loss (gain) on disposal of owned property 100 (3,809) Other changes in assets and liabilities: (Increase) decrease in receivables (7,989) 26,138 Decrease in inventories 7,651 7,720 (Increase) decrease in prepaid expenses and other current assets (28,839) 22,408 Decrease in other assets 7,721 7,073 Increase (decrease) in accounts payable 17,440 (32,741) Increase (decrease) in accrued salaries, wages and benefits 25,412 (22,798) Decrease in other accruals (5,595) (15,488) Decrease in other non-current liabilities (47,921) (54,865) Other operating activities, net (4,280) 356 ------------ ----------- Net cash provided by operating activities 22,780 79,530 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property (75,864) (134,019) Proceeds from disposal of property 142,064 42,933 ----------- ----------- Net cash provided by (used in) investing activities 66,200 (91,086) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in short-term debt - 30,000 Proceeds under revolving lines of credit - 28,253 Payments on revolving lines of credit (135,000) (28,253) Proceeds from long-term borrowings 16,016 77 Payments on long-term borrowings (1,127) (37,576) Principal payments on capital leases (7,203) (7,239) Increase in book overdrafts 15,413 3,038 Deferred financing fees (414) (2,522) Proceeds from exercises of stock options 12 2,806 ----------- ----------- Net cash used in financing activities (112,303) (11,416) Effect of exchange rate changes on cash and cash equivalents 6,916 463 ----------- ----------- Net decrease in cash and cash equivalents (16,407) (22,509) Cash and cash equivalents at beginning of period 199,014 168,620 ----------- ----------- Cash and cash equivalents at end of period $ 182,607 $ 146,111 =========== ===========
See Notes to Quarterly Report The Great Atlantic & Pacific Tea Company, Inc. Notes to Consolidated Financial Statements 1. Basis of Presentation The accompanying consolidated financial statements of The Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "Our Company") for the 12 and 28 weeks ended September 6, 2003 and September 7, 2002 are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial position and results of operations for such periods. The consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our Fiscal 2002 Annual Report on Form 10-K. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements include the accounts of our Company and all majority-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior year amounts to conform to current year presentation. 2. Discontinued Operations In February 2003, we announced the sale of a portion of our non-core assets, including nine of our stores in northern New England and seven stores in Madison, Wisconsin. In March 2003, we entered into an agreement to sell an additional eight stores in northern New England. Upon the decision to sell these stores, we applied the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") to these properties held for sale. SFAS 144 requires properties held for sale to be classified as a current asset and valued on an asset-by-asset basis at the lower of carrying amount or fair value less costs to sell. In applying those provisions, we considered the binding sale agreements related to these properties as an estimate of the assets' fair value. As a result of the adoption of SFAS 144, $22.1 million in net property, plant and equipment was reclassified as held for sale as of February 22, 2003, and included in "Prepaid expenses and other current assets" on our Consolidated Balance Sheets. As of April 2003, all of the asset sales described above were completed, generating proceeds of $137.6 million and resulting in a gain of $81.4 million ($47.2 million after tax). This gain was included in "(Loss) gain on disposal of discontinued operations, net of tax" on our Consolidated Statements of Operations for the 28 weeks ended September 6, 2003. Also, during the first quarter of fiscal 2003, we adopted a formal plan to exit the Milwaukee, Wisconsin market, where our remaining 23 Kohl's stores are located, as well as our Eight O'Clock Coffee business through the sale and/or disposal of these assets. Upon the decision to exit the remaining Kohl's stores and coffee business, we estimated the assets' fair market value using a probability weighted average approach based upon expected proceeds and recorded impairment losses on the property, plant and equipment of $15.2 million, which is included in "(Loss) income from operations of discontinued businesses, net of tax" on our Consolidated Statements of Operations for the first quarter of fiscal 2003. As a result, $16.4 million in net property, plant and equipment relating to our remaining properties held for sale, primarily our Kohl's stores and coffee business, were reclassified at June 14, 2003, and included in "Prepaid expenses and other current assets" on our Consolidated Balance Sheets. These assets will no longer be depreciated. During the 12 weeks ended September 6, 2003, we closed the remaining Kohl's stores that had not been sold and recorded exit costs of $25.1 million relating to future rent vacancy, $7.2 million in severance charges and $0.7 million in inventory markdowns. As a result, at September 6, 2003, $11.7 million of the northern New England and Kohl's exit costs were included in "Other accruals" and $20.7 million in "Other non-current liabilities" on our Consolidated Balance Sheets. In addition, based upon further information relating to the disposal of these properties held for sale, we recorded additional impairment losses of $3.7 million during the second quarter of fiscal 2003 to reduce the carrying value of certain of these assets. We participate in various multi-employer union pension plans, which are administered jointly by management and union representatives and which sponsor most full-time and certain part-time union employees who are not covered by our other pension plans. The decision to close our Kohl's stores and terminate our participation in these plans triggered our Company's liability for our unfunded vested benefits or other expenses under these jointly administered union/management plans. As a result, we recorded expense for these plans of approximately $2.5 million and $5.5 million for the 12 and 28 weeks ended September 6, 2003. In addition, we recorded $1.0 million in expense relating to withdrawal from Kohl's health and welfare plan during the 28 weeks ended September 6, 2003. Such amounts as well as the impairment losses and exit costs described above are included in "(Loss) income from operations of discontinued businesses, net of tax" in our Consolidated Statements of Operations. We have accounted for all of these separate business components as discontinued operations in accordance with SFAS 144. Amounts in the financial statements and related notes for all periods shown have been reclassified to reflect the discontinued operations. Summarized below are the operating results for the discontinued New England and Kohl's supermarkets and Eight O'Clock Coffee business, which are included in our Consolidated Statements of Operations, under the caption "(Loss) income from operations of discontinued businesses, net of tax".
12 Weeks Ended 28 Weeks Ended -------------------------------------- ------------------------------------- Sept. 6, 2003 Sept. 7, 2002 Sept. 6, 2003 Sept. 7, 2002 ------------------ ------------------ ------------------ ----------------- Sales $ 57,395 $ 173,296 $ 200,028 $ 386,758 Operating expenses (96,732) (168,853) (257,284) (380,443) --------- ----------- ----------- ----------- (Loss) income from operations (39,337) 4,443 (57,256) 6,315 Benefit from (provision for) income taxes 17,587 (1,866) 24,047 (2,652) --------- ----------- ----------- ----------- (Loss) income from operations of discontinued businesses $ (21,750) $ 2,577 $ (33,209) $ 3,663 =========== =========== =========== =========== Depreciation and amortization $ - $ 3,104 $ 1,551 $ 7,459 =========== =========== ============ ============
3. Long Lived Assets We review the carrying values of our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Such review is based upon groups of assets and the undiscounted estimated future cash flows from such assets to determine if the carrying value of such assets are recoverable from their respective cash flows. If such review indicates an impairment exists, we measure such impairment on a discounted basis. We also review individual assets for impairment upon determination that such assets will not be used for their intended useful life. During the 12 and 28 weeks ended September 6, 2003, we recorded impairment losses on property, plant and equipment of $4.2 million and $19.4 million, respectively, compared to $4.3 million and $10.2 million recorded during the 12 and 28 weeks ended September 7, 2002, respectively. Of these amounts, $0.5 million in both fiscal 2003 periods presented and all of the fiscal 2002 amounts related to U.S. Retail stores that were or will be closed in the normal course of business and are included in "Store operating, general and administrative expense" in our Consolidated Statements of Operations. The remaining impairment losses we recorded of $3.7 million and $18.9 million during the 12 and 28 weeks ended September 6, 2003, respectively, related to stores closed as a result of our exit of the Kohl's business and are included in our Consolidated Statements of Operations under the caption "(Loss) income from operations of discontinued businesses, net of tax" (see Note 2 of our Consolidated Financial Statements). Based upon current trends, there may be additional future impairments on long lived assets, including the potential for impairment of assets that are held and used. In certain cases, such impairment testing could also trigger a test for the recoverability of goodwill under SFAS 142 "Goodwill and Other Intangible Assets." 4. Income Taxes The income tax provision recorded for the 28 weeks ended September 6, 2003 and September 7, 2002 reflects our estimated expected annual tax rates applied to our respective domestic and foreign financial results. SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109") requires that a valuation allowance be created and offset against a net deferred tax asset if, based on existing facts and circumstances, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Based upon our continued assessment of the realization of our U.S. net deferred tax asset and our historic cumulative losses, and in particular, the significant increase in U.S. operating losses during the second quarter of fiscal 2002, we concluded that it was appropriate to establish a full valuation allowance for our U.S. net deferred tax asset in the amount of approximately $133.7 million during the 28 weeks ended September 7, 2002. During the remainder of fiscal 2002, the valuation allowance was increased by an additional $32.9 million. For the 12 and 28 weeks ended September 6, 2003, the valuation allowance was increased by $38.8 million and $35.8 million, respectively. To the extent that our U.S. operations generate taxable income in future periods, we will reverse the income tax valuation allowance. In future periods, U.S. earnings or losses will not be tax effected until such time as the certainty of future tax benefits can be reasonably assured. We had a net current deferred tax asset which is included in "Prepaid expenses and other current assets" on our Consolidated Balance Sheets totaling $0.9 million and a net non-current deferred tax liability which is included in "Other non-current liabilities" on our Consolidated Balance Sheets totaling $10.4 million at September 6, 2003 relating to our Canadian operations. 5. Wholesale Franchise Business As of September 6, 2003, the Company served 64 franchised stores. These franchisees are required to purchase inventory exclusively from our Company, which acts as a wholesaler to the franchisees. We had sales to these franchised stores of $178 million and $160 million for the second quarters of fiscal 2003 and 2002, respectively, and $428 million and $381 million for the first 28 weeks of fiscal 2003 and 2002, respectively. In addition, we sublease the stores and lease the equipment in the stores to the franchisees. We also provide merchandising, advertising, accounting and other consultative services to the franchisees for which we receive a fee, which primarily represents the reimbursement of costs incurred to provide such services. We hold as assets inventory notes collateralized by the inventory in the stores and equipment lease receivables collateralized by the equipment in the stores. The current portion of the inventory notes and equipment leases, net of an allowance for doubtful accounts, amounting to approximately $0.5 million and $3.6 million, are included in "Accounts receivable" on our Consolidated Balance Sheets at September 6, 2003 and February 22, 2003, respectively. The long-term portion of the inventory notes and equipment leases amounting to approximately $42.3 million and $41.1 million are included in "Other assets" on our Consolidated Balance Sheets at September 6, 2003 and February 22, 2003, respectively. The repayment of the inventory notes and equipment leases are dependent upon positive operating results of the stores. To the extent that the franchisees incur operating losses, we establish an allowance for doubtful accounts. We continually assess the sufficiency of the allowance on a store by store basis based upon the operating results and the related collateral underlying the amounts due from the franchisees. In the event of default by a franchisee, we reserve the option to reacquire the inventory and equipment at the store and operate the franchise as a corporate owned store. Refer to Note 6 - Impact of New Accounting Pronouncements regarding our Company's analysis of our franchisees to determine if they are variable interest entities in accordance with FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 ("FIN 46"). Refer to Note 11 - Commitments and Contingencies regarding our pending class action lawsuit relating to our Canadian franchise business. 6. Impact of New Accounting Pronouncements In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS 145, "Rescission of FASB Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections". SFAS 145 rescinds the provisions of SFAS 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS 145 related to classification of debt extinguishment are effective for fiscal years beginning after May 15, 2002. In current and future periods, we have and will classify debt extinguishment costs within income from operations and reclassify previously reported debt extinguishments as such. The provisions of SFAS 145 related to lease modifications are effective for transactions occurring after May 15, 2002. The provisions of SFAS 145 related to lease modifications did not have a material impact on our financial position or results of operations. In January 2003, the FASB issued FIN 46. FIN 46 addresses the consolidation of entities whose equity holders have either (a) not provided sufficient equity at risk to allow the entity to finance its own activities or (b) do not possess certain characteristics of a controlling financial interest. FIN 46 requires the consolidation of these entities, known as variable interest entities ("VIE's"), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that is subject to a majority of the risk of loss from the VIE's activities, entitled to receive a majority of the VIE's residual returns, or both. FIN 46 applies immediately to variable interests in VIE's created or obtained after January 31, 2003. For variable interests in a VIE created before February 1, 2003, FIN 46 is applied to the VIE's no later than the end of the first reporting period ending after December 15, 2003 (the quarter and year ending February 28, 2004 for our Company). The Interpretation requires certain disclosures in financial statements issued after January 31, 2003, if it is reasonably possible that our Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. As discussed further in Note 5, our Company served 64 franchised stores as of September 6, 2003. These franchisees are required to purchase inventory exclusively from our Company, which acts as a wholesaler to the franchisees. Our exposure to loss as a result of our involvement with these franchisees includes our operating income generated from our wholesale segment as detailed in Footnote 9 "Operating Segments" and our equipment leases and inventory notes, which totaled $42.8 million at September 6, 2003. We are currently in the process of analyzing the franchisees in accordance with FIN 46 to determine if any or all are VIE's. If we determine that these franchisees are VIE's, it is reasonably possible we are the primary beneficiary of these VIE's and thus would be required to consolidate these VIE's, as it is currently structured, upon FIN 46 becoming effective for our Company. In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. The new guidance amends SFAS 133 for decisions made: (a) as part of the Derivatives Implementation Group process that effectively required amendments to SFAS 133, (b) in connection with other Board projects dealing with financial instruments, and (c) regarding implementation issues raised in relation to the application of the definition of a derivative, particularly regarding the meaning of an "underlying" and the characteristics of a derivative that contains financing components. The amendments set forth in SFAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 (with a few exceptions) and for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. The provisions of SFAS 149 did not have a material impact on our financial position or results of operations. In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for classification and measurement in the balance sheets for certain financial instruments which possess characteristics of both a liability and equity. Generally, it requires classification of such financial instruments as a liability. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. For financial instruments in existence prior to May 31, 2003, SFAS 150 is effective for fiscal periods beginning after June 15, 2003 (i.e., our third quarter of fiscal 2003). We believe that the adoption of SFAS 150 will not have a material impact on our financial statements. 7. Asset Disposition Initiative In fiscal 1998 and 1999, we announced a plan to close two warehouse facilities and a coffee plant in the U.S., a bakery plant in Canada and 166 stores including the exit of the Richmond, Virginia and Atlanta, Georgia markets. In addition, during the third quarter of fiscal 2001, we announced that certain underperforming operations, including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses would be closed and/or sold, and certain administrative streamlining would take place. As of September 6, 2003, we closed all of the above stores and facilities. The following table summarizes the activity related to the charges recorded for the aforementioned initiatives since the beginning of fiscal 2002:
Severance and Goodwill/ Occupancy Benefits Fixed Assets Total ------------ ------------- -------------- ------------ Balance at February 23, 2002 $ 143,700 $ 22,137 $ - $ 165,837 Addition (1) 7,249 3,544 - 10,793 Utilization (2) (34,003) (19,830) 776 (53,057) Adjustments (3) (13,825) 889 (776) (13,712) ------------ ------------- -------------- ------------ Balance at February 22, 2003 $ 103,121 $ 6,740 $ - $ 109,861 Addition (1) 3,120 - - 3,120 Utilization (2) (13,960) (2,691) - (16,651) Adjustments (3) (6,778) 958 - (5,820) ------------ ------------- -------------- ------------ Balance at September 6, 2003 $ 85,503 $ 5,007 $ - $ 90,510 ============ ============= ============== ============
(1) The additions to occupancy represent the present value of accrued interest related to lease obligations. The addition to severance during fiscal 2002 related to retention and productivity incentives that were accrued as earned. (2) Occupancy utilization represents vacancy related payments for closed locations. Severance utilization represents payments made to terminated employees during the period. (3) At each balance sheet date, we assess the adequacy of the balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. During fiscal 2003, we recorded net adjustments of $5.8 million primarily related to reversals of previously accrued vacancy related costs due to favorable results of terminating and subleasing certain locations. During fiscal 2002, we recorded net adjustments of $13.7 million primarily related to reversals of previously accrued vacancy related costs due to the following: o Favorable results of assigning leases at certain locations of $7.2 million; o The decision to continue to operate one of the stores previously identified for closure due to changes in the competitive environment in the market in which that store is located of $3.3 million; and o The decision to proceed with development at a site that we had chosen to abandon at the time of the original charge due to changes in the competitive environment in the market in which that site is located of $3.3 million. As of September 6, 2003, we paid approximately $54 million of the total original severance and benefits charge recorded, which resulted from the termination of approximately 4,500 employees. The remaining severance liability primarily relates to future obligations for early withdrawal from multi-employer union pension plans and individual severance payments which will be paid by the end of fiscal 2003. At September 6, 2003, approximately $16.0 million of the liability was included in "Other accruals" and the remaining amount was included in "Other non-current liabilities" on our Consolidated Balance Sheets. Included in our Consolidated Statements of Operations for the 12 and 28 weeks ended September 6, 2003 and September 7, 2002 are the sales and operating results of the aforementioned stores while they were open during the periods presented. The results of these operations are as follows:
12 Weeks Ended 28 Weeks Ended ------------------------------- ------------------------------- Sept. 6, Sept. 7, Sept. 6, Sept. 7, 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Sales $ - $ 7,434 $ 316 $ 26,546 ============= ============ ============= ============= Operating loss $ - $ (932) $ (72) $ (2,220) ============= ============ ============= =============
Based upon current available information, we evaluated the liability balance as of September 6, 2003 of $91 million and have concluded that it is adequate. We will continue to monitor the status of the vacant properties and adjustments to the reserve balance may be recorded in the future, if necessary. 8. Stock Based Compensation We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") with pro forma disclosure of compensation expense, net income or loss and earnings per share as if the fair value based method prescribed by SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148") had been applied. Had compensation cost for our stock options been determined based on the fair value at the grant dates for awards under those plans consistent with the fair value methods prescribed by SFAS 123 and SFAS 148, our net loss and net loss per share would have been reduced to the pro forma amounts indicated below:
12 Weeks Ended 28 Weeks Ended ----------------------------------- ----------------------------------- Sept. 6, Sept. 7, Sept. 6, Sept. 7, 2003 2002 2003 2002 --------------- ---------------- --------------- --------------- Net loss, as reported: $ (83,690) $ (144,684) $ (63,410) $ (142,809) Deduct/(Add): Stock-based employee compensation income included in reported net income, net of related tax effects - - - 449 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,422) (1,996) (3,543) (3,978) -------------- --------------- -------------- -------------- Pro forma net loss $ (85,112) $ (146,680) $ (66,953) $ (147,236) ============== =============== ============== ============== Net loss per share - basic and diluted: As reported $ (2.17) $ (3.76) $ (1.65) $ (3.71) Pro forma $ (2.21) $ (3.81) $ (1.74) $ (3.82)
The pro forma effect on net loss and net loss per share may not be representative of the pro forma effect in future years because it includes compensation cost on a straight-line basis over the vesting periods of the grants. The fair value of the option grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
12 Weeks Ended 28 Weeks Ended ----------------------------------- ----------------------------------- Sept. 6, Sept. 7, Sept. 6, Sept. 7, 2003 2002 2003 2002 --------------- ---------------- --------------- --------------- Expected life 7 years 7 years 7 years 7 years Volatility 49% 47% 49% 47% Risk-free interest rate range 2.71%-4.01% 3.85%-4.57% 2.71%-4.01% 3.85%-5.18%
9. Operating Segments Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chairman of the Board, President and Chief Executive Officer. We currently operate in three reportable segments: United States Retail, Canada Retail and Canada Wholesale. The retail segments are comprised of retail supermarkets in the United States and Canada, while the wholesale segment is comprised of our Canadian operation that serves as the exclusive wholesaler to our franchised stores and serves as wholesaler to certain third party retailers. The accounting policies for the segments are the same as those described in the summary of significant accounting policies included in our Fiscal 2002 Annual Report. We measure segment performance based upon income (loss) from operations. Interim information on segments is as follows:
12 Weeks Ended 28 Weeks Ended ---------------------------------------- --------------------------------------- (Dollars in thousands) September 6, September 7, September 6, September 7, 2003 2002 2003 2002 ------------------ ------------------ ----------------- ----------------- Sales U.S. Retail $ 1,735,013 $ 1,715,173 $ 3,993,343 $ 4,014,889 Canada Retail 531,045 451,934 1,226,033 1,024,818 Canada Wholesale 177,642 160,075 428,154 381,251 ------------------ ------------------ ----------------- ----------------- Total Company $ 2,443,700 $ 2,327,182 $ 5,647,530 $ 5,420,958 ================== ================== ================= ================= Depreciation and amortization U.S. Retail $ 50,002 $ 49,281 $ 119,403 $ 109,956 Canada Retail 11,594 9,459 26,289 21,335 Canada Wholesale - - - - ------------------ ------------------ ----------------- ----------------- Total Company $ 61,596 $ 58,740 $ 145,692 $ 131,291 ================== ================== ================= ================= (Loss) income from operations U.S. Retail $ (37,250) $ (31,123) $ (69,607) $ (27,265) Canada Retail 10,759 16,756 21,438 28,256 Canada Wholesale 5,578 6,760 14,797 16,616 ------------------ ------------------ ----------------- ----------------- Total Company $ (20,913) $ (7,607) $ (33,372) $ 17,607 ================== =================== ================== ================= (Loss) income from continuing operations before income taxes U.S. Retail $ (53,017) $ (46,835) $ (107,538) $ (66,570) Canada Retail 10,249 15,737 20,133 25,746 Canada Wholesale 5,683 6,956 15,116 17,103 ------------------ ------------------ ----------------- ----------------- Total Company $ (37,085) $ (24,142) $ (72,289) $ (23,721) ================== ================== ================= ================= Capital expenditures U.S. Retail $ 7,249 $ 38,895 $ 46,314 $ 108,249 Canada Retail 11,666 6,633 29,550 25,770 Canada Wholesale - - - - ------------------ ------------------ ----------------- ----------------- Total Company $ 18,915 $ 45,528 $ 75,864 $ 134,019 ================== ================== ================= ================= September 6, February 22, 2003 2003 ----------------- ----------------- Total assets U.S. Retail $ 2,041,050 $ 2,216,455 Canada Retail 683,356 597,634 Canada Wholesale 80,468 71,148 ----------------- ----------------- Total Company $ 2,804,874 $ 2,885,237 ================= =================
10. North American Power Outage In August 2003, a major power outage affected our Northeast, Michigan and Canadian operations. We maintain insurance coverage which provides for reimbursement for product loss as well as incremental costs incurred as a result of this blackout. Therefore, our second quarter results were not materially affected by the power outage. 11. Commitments and Contingencies In May of 1999, four present and former employees of The Food Emporium filed suit against our Company in federal court in New York for unpaid wages and overtime. In April 2000, the judge certified the case as a class action status for this case covering approximately 82 stores in 9 counties in the New York metropolitan area. Approximately 840 current and former full and part-time employees of The Food Emporium and A&P opted into the class. In April 2003, the Company filed a Motion to Decertify the Collective Action under the Fair Labor Standards Act. In April 2002, three Canadian Food Basics franchisees commenced a breach of contract action in a Canadian court against The Great Atlantic & Pacific Company of Canada, Limited ("A&P Canada") as representative plaintiffs for a purported class of approximately 70 current and former Canadian Food Basics franchisees. The lawsuit seeks unspecified damages in connection with A&P Canada's alleged failure to distribute to the franchisees the full amount of vendor allowances and/or rebates to which the franchisees claim they are entitled under the operative franchise agreements. A&P Canada disputes the plaintiff-franchisees' claim and has filed a counterclaim seeking to recover subsidies made by it to the plaintiffs. The lawsuit was certified as a class action in December 2002. The majority of the potential class members have opted out of this class proceeding. A&P Canada has obtained leave to appeal the class certification order. The appeal hearing took place on June 26, 2003 and June 27, 2003. The appeal court has not yet rendered its decision. On June 5, 2002, a purported securities class action Complaint was filed in the United States District Court for the District of New Jersey against our Company and certain of our officers and directors in an action captioned Brody v. The Great Atlantic & Pacific Tea Co., Inc., No. 02 CV 2674 (FSH). The Brody lawsuit and four subsequently-filed related lawsuits were consolidated into a single lawsuit captioned In re The Great Atlantic & Pacific Tea Company, Inc. Securities Litigation, No. 02 CV 2674 (FSH) (the "Class Action Lawsuit"). On December 2, 2002, plaintiffs filed their Consolidated Amended Class Action Complaint (the "Complaint"), which alleged claims under Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934 arising out of our Company's July 5, 2002 filing of restated financial statements for fiscal 1999, fiscal 2000 and the first three quarters of fiscal 2001. The Complaint in the Class Action Lawsuit sought unspecified money damages, costs and expenses. On January 17, 2003, defendants filed a motion seeking to dismiss the Complaint. On February 28, 2003, plaintiffs filed their brief in opposition to defendants' motion. Defendants' reply brief in support of their dismissal motion was filed on March 28, 2003. By Opinion & Order entered on September 18, 2003, the Court dismissed plaintiffs' Complaint without prejudice. The Court ultimately imposed an October 7, 2003 deadline by which plaintiffs' Second Amended Complaint had to be filed. On October 1, 2003, defendants filed a motion requesting that the Court reconsider the portion of its September 18, 2003 Opinion & Order which granted plaintiffs' leave to further amend. By letter dated October 8, 2003, plaintiffs advised the Court that they did not intend to file a Second Amended Complaint and, in fact, no Second Amended Complaint was filed by that deadline. On October 13, 2003, plaintiffs filed a Notice of Appeal advising that they are appealing to the United States Court of Appeals for the Third Circuit from the District Court's September 18, 2003 Opinion & Order. We are subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. We are also subject to certain environmental claims. While the outcome of these claims cannot be predicted with certainty, Management does not believe that the outcome of any of these legal matters will have a material adverse effect on our consolidated results of operations, financial position or cash flows. ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION - ------------ This Management's Discussion and Analysis describes matters considered by Management to be significant to understanding the financial position, results of operations and liquidity of our Company, including a discussion of the results of operations as well as liquidity and capital resources. These items are presented as follows: o Basis of Presentation -- a discussion of our Company's fiscal year end and interim reporting periods. o Results of Continuing Operations and Liquidity and Capital Resources -- a discussion of the following: - Results for the 12 weeks ended September 6, 2003 compared to the 12 weeks ended September 7, 2002; - Results for the 28 weeks ended September 6, 2003 compared to the 28 weeks ended September 7, 2002; - The Company's Asset Disposition Initiative; and - Current and expected future liquidity. o Critical Accounting Estimates -- a discussion of significant estimates made by Management. BASIS OF PRESENTATION - --------------------- The accompanying consolidated financial statements of The Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "Our Company") for the 12 and 28 weeks ended September 6, 2003 and September 7, 2002 are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial position and results of operations for such periods. The consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our Fiscal 2002 Annual Report on Form 10-K. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements include the accounts of our Company and all majority-owned subsidiaries. RESULTS OF CONTINUING OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------- Our consolidated financial information presents the income related to our operations of discontinued businesses separate from the results of our continuing operations. The discussion and analysis that follows focuses on continuing operations. 12 WEEKS ENDED SEPTEMBER 6, 2003 COMPARED TO THE 12 WEEKS ENDED SEPTEMBER 7, 2002 - --------------------------------------------------------------- OVERALL - ------- Sales for the second quarter of fiscal 2003 were $2.4 billion, compared with $2.3 billion in the second quarter of fiscal 2002; comparable store sales, which includes stores that have been in operation for two full fiscal years and replacement stores, increased 1.1%. Net loss per share - basic and diluted for the second quarter of fiscal 2003 was $2.17 compared to $3.76 for the second quarter of fiscal 2002. SALES - ----- Sales for the second quarter of fiscal 2003 of $2,444 million increased $117 million or 5.0% from sales of $2,327 million for the second quarter of fiscal 2002. The higher sales were due to an increase in retail sales of $99 million and an increase in wholesale sales of $18 million. The increase in retail sales was attributable to the opening of 33 new stores since the beginning of the second quarter of fiscal 2002, of which 11 were opened in fiscal 2003, increasing sales by $30 million, the favorable effect of the Canadian exchange rate, which increased sales by $59 million, and the increase in comparable store sales for the second quarter of fiscal 2003 of 1.1% (up 1.5% in the U.S. and down 0.4% in Canada) when compared to the second quarter of fiscal 2002. These increases were partially offset by the closure of 66 stores since the beginning of the second quarter of fiscal 2002, of which 43 were sold or closed in fiscal 2003, which decreased sales by $15 million. The increase in wholesale sales was attributable to the favorable effect of the Canadian exchange rate of $20 million offset by lower sales volume of $2 million. Sales in the U.S. for the second quarter of fiscal 2003 increased by $20 million or 1.2% compared to the second quarter of fiscal 2002. Sales in Canada for the second quarter of fiscal 2003 increased by $97 million or 15.8% from the second quarter of fiscal 2002. Average weekly sales per supermarket were approximately $304,000 for the second quarter of fiscal 2003 versus $294,200 for the corresponding period of the prior year, an increase of 3.3%. This increase was primarily due to the increase in the Canadian exchange rate and higher comparable store sales. GROSS MARGIN - ------------ Gross margin as a percentage of sales decreased 137 basis points to 26.96% for the second quarter of fiscal 2003 from 28.33% for the second quarter of fiscal 2002. The gross margin dollar decrease of $0.4 million resulted from the decrease in the gross margin rate partially offset by the increases in sales volume and the favorable Canadian exchange rate. The U.S. operations gross margin decrease of $13 million resulted from decreases of $19 million due to the lower gross margin rate partially offset by $6 million due to higher sales volume. The Canadian operations gross margin increase of $13 million resulted from increases of $4 million due to higher sales volume and $17 million from fluctuations in the Canadian exchange rate partially offset by a decrease of $8 million due to a lower gross margin rate. This 137 basis point decrease was caused primarily by continued competitive pressures to drive sales volume and protect market share in the current market. Included in gross margin for the second quarter of fiscal 2002 were costs related to our asset disposition initiative of $0.2 million, which were incurred to mark down inventory in stores announced for closure. There were no such costs recorded in the second quarter of fiscal year 2003. STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE - --------------------------------------------------- Store operating, general and administrative expense ("SG&A") was $680 million for the second quarter of fiscal 2003 compared to $667 million for the second quarter of fiscal 2002. As a percentage of sales, SG&A was 27.82% for the second quarter of fiscal 2003 compared to 28.66% for the second quarter of fiscal 2002. The major items impacting this decrease in SG&A as a percentage of sales include: o Higher mix of sales in Canada which has a lower SG&A rate due to the increase in the Canadian exchange rate; o Lower store occupancy expense; o Lower closed store expenses for stores closed during the normal course of business; and o Lower costs related to our business process initiative; Partially offset by the following: o Higher severance and employee buy-out costs in the U.S.; o Increased labor costs as a percentage of sales in the U.S. Included in SG&A for the second quarter of fiscal 2003 were net gains of $5.2 million primarily relating to favorable lease terminations previously reserved for as part of our asset disposition initiative. In addition, included in SG&A for the second quarter of fiscal 2002 were net costs of $1.1 million relating to our asset disposition initiative as described in Note 2 of our Consolidated Financial Statements included in our Fiscal 2002 Annual Report to Stockholders. Also included in SG&A for fiscal 2002 were $15.0 million relating to our business process initiative. Such costs primarily included professional consulting fees and salaries, including related benefits, of employees working full-time on the initiative. We also review individual assets for impairment upon determination that such assets will not be used for their intended useful life. During the second quarter of fiscal 2003 and 2002, we recorded impairment losses on property, plant and equipment of $0.5 million and $4.3 million, respectively, related to U.S. Retail stores that were or will be closed in the normal course of business. This amount is included in "Store operating, general and administrative expense" in our Consolidated Statements of Operations. Based upon current trends, there may be additional future impairments on long lived assets, including the potential for impairment of assets that are held and used. In certain cases, such impairment testing could also trigger a test for the recoverability of goodwill under SFAS 142 "Goodwill and Other Intangible Assets." INTEREST EXPENSE - ---------------- Interest expense of $18 million for the second quarter of fiscal 2003 decreased from the prior year amount of $20 million due primarily to lower interest expense resulting from our open market repurchase of $51 million of our 7.75% Senior Notes due April 15, 2007 and $45 million of our 9.125% Senior Notes due December 15, 2011, during fiscal 2002. INCOME TAXES - ------------ The provision for income taxes from continuing operations for the second quarter of fiscal 2003 was $20 million (a $14 million provision for our U.S. operations and a $6 million provision for our Canadian operations) compared to $123 million (a $114 million provision for our U.S. operations and a $9 million provision for our Canadian operations) for the second quarter of fiscal 2002. $13 million of our U.S. tax provision from continuing operations was offset by a tax benefit provided on discontinued operations in accordance with Statement of Financial Accounting Standards 109, "Accounting for Income Taxes". (LOSS) INCOME FROM OPERATIONS OF DISCONTINUED BUSINESSES, NET OF TAX - -------------------------------------------------------------------- Loss from operations of discontinued businesses, net of tax for the second quarter of fiscal 2003 was $22 million as compared to income from operations of $3 million for the second quarter of fiscal 2002. Beginning in the fourth quarter of fiscal year 2002 and in the early part of the first quarter of fiscal 2003, we decided to sell our operations located in Northern New England, Madison and Milwaukee, Wisconsin as well as our Eight O'Clock Coffee business. During the second quarter of fiscal 2003, we decided to close the remaining Kohl's stores that had not been sold and recorded exit costs of $25.1 million relating to future rent vacancy, $7.2 million in severance charges and $0.7 million in inventory markdowns. In addition, based upon further information relating to the disposal of these properties held for sale, we recorded additional impairment losses of $3.7 million during the second quarter of fiscal 2003 to reduce the carrying value of these assets and $2.5 million in pension expense relating to early withdrawal from various multi-employer union pension plans we participate in. The remaining amounts for each period represent the operating results of the stores in these locations as well as our Eight O'Clock Coffee business. 28 WEEKS ENDED SEPTEMBER 6, 2003 COMPARED TO THE 28 WEEKS ENDED SEPTEMBER 7, 2002 - ------------------------------------------------------------------------------- OVERALL - ------- Sales for the 28 weeks ended September 6, 2003 were $5.6 billion, compared with $5.4 billion in the 28 weeks ended September 7, 2002; comparable store sales, which includes stores that have been in operation for two full fiscal years and replacement stores, increased 0.4%. Net loss per share - basic and diluted for the 28 weeks ended September 6, 2003 was $1.65 compared to $3.71 for the 28 weeks ended September 7, 2002. SALES - ----- Sales for the 28 weeks ended September 6, 2003 of $5,648 million increased $227 million or 4.2% from sales of $5,421 million for the 28 weeks ended September 7, 2002. The higher sales were due to an increase in retail sales of $180 million and an increase in wholesale sales of $47 million. The increase in retail sales was attributable to the opening of 42 new stores since the beginning of fiscal 2002, of which 11 were opened in fiscal 2003, increasing sales by $96 million, the favorable effect of the Canadian exchange rate, which increased sales by $121 million, and the increase in comparable store sales for the 28 weeks ended September 6, 2003 of 0.4% (flat in the U.S. and up 1.9% in Canada) when compared to the 28 weeks ended September 7, 2002. This increase was partially offset by the closure of 85 stores since the beginning of fiscal 2002, of which 43 were sold or closed in fiscal 2003, which decreased sales by $55 million. The increase in wholesale sales was attributable to higher sales volume of $5 million and the favorable effect of the Canadian exchange rate of $42 million. Sales in the U.S. for the 28 weeks ended September 6, 2003 decreased by $21 million or 0.5% compared to the 28 weeks ended September 7, 2002. Sales in Canada for the 28 weeks ended September 6, 2003 increased by $248 million or 17.6% from the 28 weeks ended September 7, 2002. Average weekly sales per supermarket were approximately $300,800 for the 28 weeks ended September 6, 2003 versus $293,100 for the corresponding period of the prior year, an increase of 2.6%. This increase was primarily due to the increase in the Canadian exchange rate and higher comparable store sales. GROSS MARGIN - ------------ Gross margin as a percentage of sales decreased 119 basis points to 27.23% for the 28 weeks ended September 6, 2003 from 28.43% for the 28 weeks ended September 7, 2002. The gross margin dollar decrease of $3 million resulted from the decrease in the gross margin rate partially offset by the increases in sales volume and the favorable Canadian exchange rate. The U.S. operations gross margin decrease of $35 million resulted from decreases of $7 million due to lower sales volume and $28 million due to a lower gross margin rate. The Canadian operations gross margin increase of $32 million resulted from increases of $19 million due to higher sales volume and $34 million from fluctuations in the Canadian exchange rate partially offset by a decrease of $21 million due to a lower gross margin rate. This 119 basis point decrease was caused primarily by continued competitive pressures to drive sales volume and protect market share in the current market. Included in gross margin for the 28 weeks ended September 7, 2002 were costs related to our asset disposition initiative of $1.0 million, which were incurred to mark down inventory in stores announced for closure. There were no such costs recorded in the 28 weeks ended September 6, 2003. STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE - --------------------------------------------------- Store operating, general and administrative expense ("SG&A") was $1.6 billion for the 28 weeks ended September 6, 2003 compared to $1.5 billion for the 28 weeks ended September 7, 2002. As a percentage of sales, SG&A was 27.83% for the 28 weeks ended September 6, 2003 compared to 28.10% for the 28 weeks ended September 7, 2002. The major items impacting this decrease in SG&A as a percentage of sales include: o Higher mix of sales in Canada which has a lower SG&A rate due to the increase in the Canadian exchange rate; and o Lower costs related to our business process initiative; Partially offset by the following: o Increased labor costs as a percentage of sales in the U.S.; o Higher severance and employee buy-out costs in the U.S.; o Increased advertising costs for store promotional expense; and o Higher store occupancy expense Included in SG&A for the 28 weeks ended September 6, 2003 were net gains of $5.2 million primarily relating to favorable lease terminations previously reserved for as part of our asset disposition initiative. In addition, included in SG&A for the 28 weeks ended September 7, 2002 were net costs of $7.2 million relating to our asset disposition initiative as described in Note 2 of our Consolidated Financial Statements included in our Fiscal 2002 Annual Report to Stockholders, a loss of $0.7 million relating to the early extinguishment of $38 million of our 7.75% Notes due April 15, 2007 as described in Note 6 of our Consolidated Financial Statements included in our Fiscal 2002 Annual Report to Stockholders and a gain of $1.7 million related to the sale of securities received as part of the demutualization of The Prudential Insurance Company as described in Note 15 of our Consolidated Financial Statements included in our Fiscal 2002 Annual Report to Stockholders. Also included in SG&A for the 28 weeks ended September 7, 2002 were $35.1 million relating to our business process initiative. Such costs primarily included professional consulting fees and salaries, including related benefits, of employees working full-time on the initiative. We also review individual assets for impairment upon determination that such assets will not be used for their intended useful life. During the 28 weeks ended September 6, 2003 and September 7, 2002, we recorded impairment losses on property, plant and equipment of $0.5 million and $10.2 million, respectively, related to U.S. Retail stores that were or will be closed in the normal course of business. This amount is included in "Store operating, general and administrative expense" in our Consolidated Statements of Operations. Based upon current trends, there may be additional future impairments on long lived assets, including the potential for impairment of assets that are held and used. In certain cases, such impairment testing could also trigger a test for the recoverability of goodwill under SFAS 142 "Goodwill and Other Intangible Assets." INTEREST EXPENSE - ---------------- Interest expense of $43 million for the 28 weeks ended September 6, 2003 decreased from the prior year amount of $46 million due primarily to lower interest expense resulting from our open market repurchase of $51 million of our 7.75% Senior Notes due April 15, 2007 and $45 million of our 9.125% Senior Notes due December 15, 2011, during fiscal 2002. INCOME TAXES - ------------ The provision for income taxes from continuing operations for the 28 weeks ended September 6, 2003 was $5 million (an $8 million benefit for our U.S. operations and a $13 million provision for our Canadian operations) compared to $123 million (a $106 million provision for our U.S. operations and a $17 million provision for our Canadian operations) for the 28 weeks ended September 7, 2002. Our U.S. tax benefit from continuing operations was offset by a tax provision provided on discontinued operations in accordance with Statement of Financial Accounting Standards 109, "Accounting for Income Taxes". (LOSS) INCOME FROM OPERATIONS OF DISCONTINUED BUSINESSES, NET OF TAX - -------------------------------------------------------------------- Loss from operations of discontinued businesses, net of tax for the 28 weeks ended September 6, 2003 was $33 million as compared to income from operations of $4 million for the 28 weeks ended September 7, 2002. Beginning in the fourth quarter of fiscal year 2002 and in the early part of the first quarter of fiscal 2003, we decided to sell our operations located in Northern New England, Madison and Milwaukee, Wisconsin as well as our Eight O'Clock Coffee business. During the 28 weeks ended September 6, 2003, we recorded the following costs related to these discontinued businesses: o impairment losses on the property, plant and equipment relating to these operations of $18.9 million; o pension expense relating to early withdrawal from various multi-employer union pension plans we participate in of $5.5 million; o future rent vacancy charges of $25.1 million; o severance charges of $7.2 million; and o inventory markdowns of $0.7 million. The remaining amounts for each period represent the operating results of the stores in these locations as well as our Eight O'Clock Coffee business. ASSET DISPOSITION INITIATIVE - ---------------------------- In fiscal 1998 and 1999, we announced a plan to close two warehouse facilities and a coffee plant in the U.S., a bakery plant in Canada and 166 stores including the exit of the Richmond, Virginia and Atlanta, Georgia markets. In addition, during the third quarter of fiscal 2001, we announced that certain underperforming operations, including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses would be closed and/or sold, and certain administrative streamlining would take place. As of September 6, 2003, we closed all of the above stores and facilities. The following table summarizes the activity related to the charges recorded for the aforementioned initiatives since the beginning of fiscal 2002:
Severance and Goodwill/ Occupancy Benefits Fixed Assets Total ------------- ------------- -------------- ------------- Balance at February 23, 2002 $ 143,700 $ 22,137 $ - $ 165,837 Addition (1) 7,249 3,544 - 10,793 Utilization (2) (34,003) (19,830) 776 (53,057) Adjustment (3) (13,825) 889 (776) (13,712) ------------- ------------- --------------- ------------ Balance at February 22, 2003 $ 103,121 $ 6,740 $ - $ 109,861 Addition (1) 3,120 - - 3,120 Utilization (2) (13,960) (2,691) - (16,651) Adjustments (3) (6,778) 958 - (5,820) ------------ ------------- -------------- ------------ Balance at September 6, 2003 $ 85,503 $ 5,007 $ - $ 90,510 ============ ============= ============== ============
(1) The additions to occupancy represent the present value of accrued interest related to lease obligations. The addition to severance during fiscal 2002 related to retention and productivity incentives that were accrued as earned. (2) Occupancy utilization represents vacancy related payments for closed locations. Severance utilization represents payments made to terminated employees during the period. (3) At each balance sheet date, we assess the adequacy of the balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. During fiscal 2003, we recorded net adjustments of $5.8 million primarily related to reversals of previously accrued vacancy related costs due to favorable results of terminating and subleasing certain locations. During fiscal 2002, we recorded net adjustments of $13.7 million primarily related to reversals of previously accrued vacancy related costs due to the following: o Favorable results of assigning leases at certain locations of $7.2 million; o The decision to continue to operate one of the stores previously identified for closure due to changes in the competitive environment in the market in which that store is located of $3.3 million; and o The decision to proceed with development at a site that we had chosen to abandon at the time of the original charge due to changes in the competitive environment in the market in which that site is located of $3.3 million. As of September 6, 2003, we paid approximately $54 million of the total original severance and benefits charge recorded, which resulted from the termination of approximately 4,500 employees. The remaining severance liability primarily relates to future obligations for early withdrawal from multi-employer union pension plans and individual severance payments which will be paid by the end of fiscal 2003. At September 6, 2003, approximately $16.0 million of the liability was included in "Other accruals" and the remaining amount was included in "Other non-current liabilities" on our Consolidated Balance Sheets. Included in our Consolidated Statements of Operations for the 12 and 28 weeks ended September 6, 2003 and September 7, 2002 are the sales and operating results of the aforementioned stores while they were open during the periods presented. The results of these operations are as follows:
12 Weeks Ended 28 Weeks Ended ------------------------------- ------------------------------- Sept. 6, Sept. 7, Sept. 6, Sept. 7, 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Sales $ - $ 7,434 $ 316 $ 26,546 ============= ============ ============= ============= Operating loss $ - $ (932) $ (72) $ (2,220) ============= ============ ============= =============
Based upon current available information, we evaluated the liability balance as of September 6, 2003 of $91 million and have concluded that it is adequate. We will continue to monitor the status of the vacant properties and adjustments to the reserve balance may be recorded in the future, if necessary. LIQUIDITY AND CAPITAL RESOURCES We had negative working capital of $83 million at September 6, 2003 compared to positive working capital of $9 million at February 22, 2003. We had cash and cash equivalents aggregating $183 million at September 6, 2003 compared to $199 million at the end of fiscal 2002. The decrease in working capital was attributable primarily to the following: o A decrease in cash and cash equivalents as detailed in the Consolidated Statements of Cash Flows; o A decrease in inventories primarily relating to seasonality and the closure of our Kohl's stores; o An increase in accounts payable (inclusive of book overdrafts); and o An increase in other accruals. Partially offset by the following: o An increase in accounts receivable due to timing of receipts and insurance recoveries; and o An increase in prepaid expenses and other current assets due to the amortization of prepaid rent. At September 6, 2003, we had a $425 million secured revolving credit agreement (as amended, the "Secured Credit Agreement") with a syndicate of lenders enabling us to borrow funds on a revolving basis sufficient to refinance short-term borrowings and provide working capital as needed. This agreement is comprised of a U.S. credit agreement amounting to $340 million and a Canadian credit agreement amounting to $85 million (C$116.4 million at September 6, 2003) and is collateralized primarily by inventory and company-owned real estate. Borrowings under the Secured Credit Agreement bear interest based on LIBOR and Prime interest rate pricing. Under the Secured Credit Agreement, $40 million of the loan commitments expire in December 2003 and $385 million of the loan commitments expire in June 2005. As of September 6, 2003, we had $16.0 million in borrowings under the Secured Credit Agreement. Accordingly, as of September 6, 2003, after reducing availability for outstanding letters of credit and borrowing base requirements, we had $231 million available under the Secured Credit Agreement. Our loan agreements and certain notes contain various financial covenants, which require among other things, minimum fixed charge coverage (compares EBITDA plus rent and interest plus rents) and levels of leverage (compares EBITDA with outstanding indebtedness under the agreement) and capital expenditures. On February 21, 2003, we amended the Secured Credit Agreement in order to allow for greater flexibility for fiscal year 2003. The amendment is effective through and including the first quarter of fiscal year 2004 and includes, among other things, a change to the fixed coverage ratio from 1.4 to 1.15, a senior secured leverage ratio of 1.80, a waiver of the total leverage ratio, a minimum EBITDA level and a limitation on capital expenditures. Certain of the covenants are impacted by the amount of proceeds we receive from asset sales. At September 6, 2003, we were in compliance with all of our covenants. During the 28 weeks ended September 7, 2002, we repurchased in the open market $38 million of our 7.75% Notes due April 15, 2007. The cost of this open market repurchase resulted in a pretax loss due to the early extinguishment of debt of $0.7 million. In accordance with SFAS No. 145, "Rescission of FASB Statements 4, 44 and 64, Amendment of FASB 13, and Technical Corrections", this loss has been reclassified within income from operations for the 28 weeks ended September 7, 2002. Under the recently amended Secured Credit Agreement, we are restricted from making additional unscheduled repurchases of bonds. We currently have active Registration Statements dated January 23, 1998 and June 23, 1999, allowing us to offer up to $75 million of debt and/or equity securities as of June 14, 2003 at terms contingent upon market conditions at the time of sale. During the 28 weeks ended September 6, 2003, our capital expenditures and debt repayments were funded through internally generated funds combined with proceeds from disposals of properties. Capital expenditures totaled $76 million during the 28 weeks ended September 6, 2003, which included 11 new supermarkets and enlarging or remodeling 2 supermarkets. For the remainder of fiscal 2003, we have planned capital expenditures of approximately $100 million. These expenditures relate primarily to opening approximately 10 new supermarkets and enlarging or remodeling 10 - 15 supermarkets. We currently expect to close approximately 5 - 10 stores during the remainder of fiscal 2003; the long lived assets of which have been evaluated for impairment in fiscal 2002. However, we periodically review our store base and may make decisions to increase the number of store closures in the future. The long lived assets of such possible closures would be evaluated for impairment in the period in which such decisions are made. We do not expect to pay dividends during fiscal 2003. We are the guarantor of a loan of $2.3 million related to a shopping center, which will expire in 2011. Our existing senior debt rating was B3 with negative implications with Moody's Investors Service ("Moody's") and B with negative implications with Standard & Poor's Ratings Group ("S&P") as of September 6, 2003. Future rating changes could affect the availability and cost of financing to the Company. We believe that our cash from operations and asset sales will be sufficient for our capital expenditure programs and mandatory scheduled debt repayments for the next twelve months. However, certain external factors such as unfavorable economic conditions, competition, labor relations and fuel and utility costs could have a significant impact on cash generation. We are exploring several actions to mitigate the potential risk, however, there can be no assurance that such actions will be successful. CRITICAL ACCOUNTING ESTIMATES - ----------------------------- Critical accounting estimates are those accounting estimates that we believe are important to the portrayal of our financial condition and results of operations and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Self-Insurance Reserves - ----------------------- Our Consolidated Balance Sheets include liabilities with respect to self-insured workers' compensation and general liability claims. We estimate the required liability of such claims on a discounted basis, utilizing an actuarial method, which is based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity). Long-Lived Assets - ----------------- We review the carrying values of our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Such review is based upon groups of assets and the undiscounted estimated future cash flows from such assets to determine if the carrying value of such assets are recoverable from their respective cash flows. If such review indicates an impairment exists, we measure such impairment on a discounted basis using a probability weighted average approach and a risk free rate. We also review individual assets for impairment upon determination that such assets will not be used for their intended useful life. During the 12 and 28 weeks ended September 6, 2003, we recorded impairment losses on property, plant and equipment of $4.2 million and $19.4 million, respectively, of which $0.5 million in both periods presented related to U.S. Retail stores that were or will be closed in the normal course of business and are included in "Store operating, general and administrative expense" in our Consolidated Statements of Operations. The remaining impairment losses we recorded of $3.7 million and $18.9 million during the 12 and 28 weeks ended September 6, 2003, respectively, related to stores closed as a result of our exit of the Kohl's business and are included in our Consolidated Statements of Operations under the caption "(Loss) income from operations of discontinued businesses, net of tax" (see Note 2 of our Consolidated Financial Statements). Based upon current trends, there may be additional future impairments on long lived assets, including the potential for impairment of assets that are held and used. Excess of Cost over Net Assets Acquired - --------------------------------------- In accordance with SFAS 142 "Goodwill and Other Intangible Assets," the excess of cost over fair value of net assets acquired is no longer required to be amortized, but tested for impairment at least annually by reassessing the appropriateness of the goodwill balance based on forecasts of cash flows from operating results on a discounted basis in comparison to the carrying value of such operations. If the results of such comparison indicate that an impairment may exist, we determine the implied fair market value of the goodwill using a purchase price allocation approach and compare this value to the balance sheet value. If such comparison indicates that an impairment exits, we will recognize a charge to operations at that time based upon the difference between the implied fair market value of the goodwill and the balance sheet value. The recoverability of goodwill is at risk to the extent we are unable to achieve our forecast assumptions regarding cash flows from operating results. If current operating trends continue, it is possible we may need to record an impairment charge to reduce the carrying value of goodwill. Closed Store Reserves - --------------------- For stores closed that are under long-term leases, we record a discounted liability using a risk free rate for the future minimum lease payments and related costs, such as utilities and taxes, from the date of closure to the end of the remaining lease term, net of estimated probable recoveries from projected sublease rentals. If estimated cost recoveries exceed our liability for future minimum lease payments, the excess is recognized as income over the term of the sublease. We estimate future net cash flows based on our experience in and our knowledge of the market in which the closed store is located. However, these estimates project net cash flow several years into the future and are affected by variable factors such as inflation, real estate markets and economic conditions. While these factors have been relatively stable in recent years, variation in these factors could cause changes to our estimates. As of September 6, 2003, we had liabilities for future minimum lease payments of $161 million, which related to 123 dark stores and 42 subleased or assigned stores. Of this amount, $50 million relates to stores closed in the normal course of business, $85 million relates to stores closed as part of the asset disposition initiative (see Note 7 of our Consolidated Financial Statements) and $26 million relates to stores closed as part of our exit of the northern New England and Kohl's businesses (see Note 2 of our Consolidated Financial Statements). Employee Benefit Plans - ---------------------- The determination of our obligation and expense for pension and other post-retirement benefits is dependent, in part, on our selection of certain assumptions used by our actuaries in calculating these amounts. These assumptions are disclosed in Note 10 of our Fiscal 2002 Annual Report on Form 10-K and include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rates of increase in compensation and health care costs. In accordance with U.S. GAAP, actual results that differ from our Company's assumptions are accumulated and amortized over future periods and, therefore, affect our recognized expense and recorded obligation in such future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and other post-retirement obligations and our future expense. Inventories - ----------- Store inventories are valued principally at the lower of cost or market with cost determined under the retail method on a first-in, first-out basis. Warehouse and other inventories are valued primarily at the lower of cost or market with cost determined on a first-in, first-out basis. Inventories of certain acquired companies are valued using the last-in, first-out method, which was their practice prior to acquisition. We evaluate inventory shrinkage throughout the year based on actual physical counts in our stores and distribution centers and record reserves based on the results of these counts to provide for estimated shrinkage between the store's last inventory and the balance sheet date. ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk MARKET RISK - ----------- Market risk represents the risk of loss from adverse market changes that may impact our consolidated financial position, results of operations or cash flows. Among other possible market risks, we are exposed to such risk in the areas of interest rates and foreign currency exchange rates. From time to time, we may enter hedging agreements in order to manage risks incurred in the normal course of business including forward exchange contracts to manage our exposure to fluctuations in foreign exchange rates. Interest Rates - -------------- Our exposure to market risk for changes in interest rates relates primarily to our debt obligations. We do not have cash flow exposure due to rate changes on our $681 million in notes as of September 6, 2003 because they are at fixed interest rates. However, we do have cash flow exposure on our committed bank lines of credit due to our variable floating rate pricing. Accordingly, during the 12 and 28 weeks ended September 6, 2003, a presumed 1% change in the variable floating rate would have impacted interest expense by nil and $0.2 million, respectively. During fiscal 2002, we had three interest rate swaps with commercial banks with an aggregate notional amount of $150 million maturing on April 15, 2007, designated as fair value hedging instruments, to effectively convert a portion of our 7.75% Notes due April 15, 2007 from fixed rate debt to floating rate debt. In January 2003, these hedging instruments were terminated, resulting in a gain of $10.2 million. This gain has been deferred and is being amortized as an offset to interest expense over the life of the underlying debt instrument. Such amount is classified as "Long term debt" in our Consolidated Balance Sheets. Foreign Exchange Risk - --------------------- We are exposed to foreign exchange risk to the extent of adverse fluctuations in the Canadian dollar. During the 12 and 28 weeks ended September 6, 2003, a change in the Canadian currency of 10% would have resulted in a fluctuation in net income of $1.0 million and $2.2 million, respectively. We do not believe that a change in the Canadian currency of 10% will have a material effect on our financial position or cash flows. ITEM 4 - Controls and Procedures Our Company maintains a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our Company's published consolidated financial statements and other disclosures included in this report. Within the 90-day period prior to the date of this report, the Company's Chairman of the Board, President and Chief Executive Officer, and Senior Vice President, Chief Financial Officer evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chairman of the Board, President and Chief Executive Officer, and Senior Vice President, Chief Financial Officer concluded that our Company's disclosure controls and procedures are effective to ensure that our Company is able to collect, process and disclose the information we are required to disclose in the report we file with the Securities and Exchange Commission within the required time periods. Since the date of the most recent evaluation of our Company's internal controls over financial reporting by our Chairman of the Board, President and Chief Executive Office, and Senior Vice President, Chief Financial Officer, there have been no significant changes in such controls or in other factors that could have significantly affected those controls, including any corrective actions with regard to significant deficiencies and material weaknesses. CAUTIONARY NOTE - --------------- This presentation may contain forward-looking statements about the future performance of our Company, and is based on our assumptions and beliefs in light of information currently available. We assume no obligation to update this information. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements including but not limited to: competitive practices and pricing in the food industry generally and particularly in our principal markets; our relationships with our employees; the terms of future collective bargaining agreements; the costs and other effects of lawsuits and administrative proceedings; the nature and extent of continued consolidation in the food industry; changes in the financial markets which may affect our cost of capital or the ability to access capital; supply or quality control problems with our vendors; and changes in economic conditions, which may affect the buying patterns of our customers. PART II. OTHER INFORMATION ITEM 1 - Legal Proceedings In May of 1999, four present and former employees of The Food Emporium filed suit against our Company in federal court in New York for unpaid wages and overtime. In April 2000, the judge certified the case as a class action status for this case covering approximately 82 stores in 9 counties in the New York metropolitan area. Approximately 840 current and former full and part-time employees of The Food Emporium and A&P opted into the class. In April 2003, the Company filed a Motion to Decertify the Collective Action under the Fair Labor Standards Act. In April 2002, three Canadian Food Basics franchisees commenced a breach of contract action in a Canadian court against The Great Atlantic & Pacific Company of Canada, Limited ("A&P Canada") as representative plaintiffs for a purported class of approximately 70 current and former Canadian Food Basics franchisees. The lawsuit seeks unspecified damages in connection with A&P Canada's alleged failure to distribute to the franchisees the full amount of vendor allowances and/or rebates to which the franchisees claim they are entitled under the operative franchise agreements. A&P Canada disputes the plaintiff-franchisees' claim and has filed a counterclaim seeking to recover subsidies made by it to the plaintiffs. The lawsuit was certified as a class action in December 2002. The majority of the potential class members have opted out of this class proceeding. A&P Canada has obtained leave to appeal the class certification order. The appeal hearing took place on June 26, 2003 and June 27, 2003. The appeal court has not yet rendered its decision. On June 5, 2002, a purported securities class action Complaint was filed in the United States District Court for the District of New Jersey against our Company and certain of our officers and directors in an action captioned Brody v. The Great Atlantic & Pacific Tea Co., Inc., No. 02 CV 2674 (FSH). The Brody lawsuit and four subsequently-filed related lawsuits were consolidated into a single lawsuit captioned In re The Great Atlantic & Pacific Tea Company, Inc. Securities Litigation, No. 02 CV 2674 (FSH) (the "Class Action Lawsuit"). On December 2, 2002, plaintiffs filed their Consolidated Amended Class Action Complaint (the "Complaint"), which alleged claims under Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934 arising out of our Company's July 5, 2002 filing of restated financial statements for fiscal 1999, fiscal 2000 and the first three quarters of fiscal 2001. The Complaint in the Class Action Lawsuit sought unspecified money damages, costs and expenses. On January 17, 2003, defendants filed a motion seeking to dismiss the Complaint. On February 28, 2003, plaintiffs filed their brief in opposition to defendants' motion. Defendants' reply brief in support of their dismissal motion was filed on March 28, 2003. By Opinion & Order entered on September 18, 2003, the Court dismissed plaintiffs' Complaint without prejudice. The Court ultimately imposed an October 7, 2003 deadline by which plaintiffs' Second Amended Complaint had to be filed. On October 1, 2003, defendants filed a motion requesting that the Court reconsider the portion of its September 18, 2003 Opinion & Order which granted plaintiffs' leave to further amend. By letter dated October 8, 2003, plaintiffs advised the Court that they did not intend to file a Second Amended Complaint and, in fact, no Second Amended Complaint was filed by that deadline. On October 13, 2003, plaintiffs filed a Notice of Appeal advising that they are appealing to the United States Court of Appeals for the Third Circuit from the District Court's September 18, 2003 Opinion & Order. ITEM 2 - Changes in Securities None ITEM 3 - Defaults Upon Senior Securities None ITEM 4 - Submission of Matters to a Vote of Security Holders At our annual meeting of shareholders, held July 16, 2003, there were 35,436,829 shares or 92.0% of the 38,515,806 shares outstanding and entitled to vote represented either in person or by proxy. The 9 Board of Directors nominated to serve for a one-year term were all elected, with each receiving an affirmative vote of at least 81.2% of the shares present. Stockholder Proposal No. 1 for a Stockholder Vote on Poison Pills was voted against by 75.9% of the total shares cast. Stockholder Proposal No. 2 for a Stockholder Vote on Annual Meeting Locations was voted against by 94.8% of the total shares cast. ITEM 5 - Other Information None ITEM 6 - Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K EXHIBIT NO. DESCRIPTION ---------- ----------- 3.1 Articles of Incorporation of The Great Atlantic & Pacific Tea Company, Inc., as amended through July 1987 (incorporated herein by reference to Exhibit 3(a) to Form 10-K filed on May 27, 1988) 3.2 By-Laws of The Great Atlantic & Pacific Tea Company, Inc., as amended through July 2, 2002 (incorporated herein by reference to Exhibit 3.2 to Form 10-K filed on July 5, 2002) 4.1 Indenture, dated as of January 1, 1991 between the Company and JPMorgan Chase Bank (formerly The Chase Manhattan Bank as successor by merger to Manufacturers Hanover Trust Company), as trustee (the "Indenture") (incorporated herein by reference to Exhibit 4.1 to Form 8-K) 4.2 First Supplemental Indenture, dated as of December 4, 2001, to the Indenture, dated as of January 1, 1991 between our Company and JPMorgan Chase Bank, relating to the 7.70% Senior Notes due 2004 (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed on December 4, 2001) 4.3 Second Supplemental Indenture, dated as of December 20, 2001, to the Indenture between our Company and JPMorgan Chase Bank, relating to the 9 1/8% Senior Notes due 2011 (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed on December 20, 2001) 4.4 Successor Bond Trustee (incorporated herein by reference to Exhibit 4.4 to Form 10-K filed on May 9, 2003) 10.1 Employment Agreement, made and entered into as of the 11th day of November, 2002, by and between our Company and Eric Claus, and Offer Letter dated the 22nd day of October, 2002 (incorporated herein by reference to Exhibit 10.1 to Form 10-Q filed on January 10, 2003) 10.2 Employment Agreement, made and entered into as of the 1st day of November, 2000, by and between the Company and William P. Costantini (incorporated herein by reference to Exhibit 10 to Form 10-Q filed on January 16, 2001) ("Costantini Agreement") 10.3 Amendment to Costantini Agreement dated April 30, 2002 (incorporated herein by reference to Exhibit 10.7 to Form 10-K filed on July 5, 2002) 10.4 Employment Agreement, made and entered into as of the 24th day of February, 2002, by and between our Company and Mitchell P. Goldstein (incorporated herein by reference to Exhibit 10.8 to Form 10-K filed on July 5, 2002) 10.5 Employment Agreement, made and entered into as of the 2nd day of October, 2002, by and between our Company and Peter Jueptner (incorporated herein by reference to Exhibit 10.26 to Form 10-Q filed on October 22, 2002) 10.6 Offer Letter dated the 18th day of September 2002, by and between our Company and Peter Jueptner (incorporated herein by reference to Exhibit 10.10 to Form 10-Q filed on January 10, 2003) 10.7 Employment Agreement, made and entered into as of the 14th day of May, 2001, by and between our Company and John E. Metzger, as amended February 14, 2002 (incorporated herein by reference to Exhibit 10.13 to Form 10-K filed on July 5, 2002) 10.8 Employment Agreement, made and entered into as of the 28th day of October, 2002, by and between our Company and Brian Piwek, and Offer Letter dated the 23rd day of October, 2002 (incorporated herein by reference to Exhibit 10.14 to Form 10-Q filed on January 10, 2003) 10.9 Employment Agreement, made and entered into as of the 16th day of June, 2003, by and between our Company and Brenda Galgano, as filed herein 10.10 Supplemental Executive Retirement Plan effective as of September 30, 1991 (incorporated herein by reference to Exhibit 10.B to Form 10-K filed on May 28, 1993) 10.11 Supplemental Executive Retirement Plan effective as of September 1, 1997 (incorporated herein by reference to Exhibit 10.B to Form 10-K filed on May 27, 1998) 10.12 Supplemental Retirement and Benefit Restoration Plan effective as of January 1, 2001 (incorporated herein by reference to Exhibit 10(j) to Form 10-K filed on May 23, 2001) 10.13 1994 Stock Option Plan (incorporated herein by reference to Exhibit 10(e) to Form 10-K filed on May 24, 1995) 10.14 1994 Stock Option Plan for Non-Employee Directors (incorporated herein by reference to Exhibit 10(f) to Form 10-K filed on May 24, 1995) 10.15 Directors' Deferred Payment Plan adopted May 1, 1996 (incorporated herein by reference to Exhibit 10(h) to Form 10-K filed on May 16, 1997) 10.16 1998 Long Term Incentive and Share Award Plan (incorporated herein by reference to Exhibit 10(k) to Form 10-K filed on May 19, 1999) 10.17 Credit Agreement dated as of February 23, 2001, among our Company, The Great Atlantic & Pacific Company of Canada, Limited and the other Borrowers party hereto and the Lenders party hereto, The Chase Manhattan Bank, as U.S. Administrative Agent, and The Chase Manhattan Bank of Canada, as Canadian Administrative Agent ("Credit Agreement") (incorporated herein by reference to Exhibit 10 to Form 10-K filed on May 23, 2001) 10.18 Amendment No. 1 and Waiver, dated as of November 16, 2001 to Credit Agreement (incorporated herein by reference to Exhibit 10.23 to Form 10-K filed on July 5, 2002) 10.19 Amendment No. 2 dated as of March 21, 2002 to Credit Agreement (incorporated herein by reference to Exhibit 10.24 to Form 10-K filed on July 5, 2002) 10.20 Amendment No. 3 dated as of April 23, 2002 to Credit Agreement (incorporated herein by reference to Exhibit 10.25 to Form 10-K filed on July 5, 2002) 10.21 Waiver dated as of June 14, 2002 to Credit Agreement (incorporated herein by reference to Exhibit 10.26 to Form 10-K filed on July 5, 2002) 10.22 Amendment No. 4 dated as of October 10, 2002 to Credit Agreement (incorporated herein by reference to Exhibit 10.27 to Form 10-Q filed on October 22, 2002) 10.23 Amendment No. 5 dated as of February 21, 2003 to Credit Agreement (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed on March 7, 2003) 10.24 Amendment No. 6 dated as of March 25, 2003 to Credit Agreement (incorporated herein by reference to Exhibit 10.28 to Form 10-K filed on May 9, 2003) 23.1 Consent of Independent Accountants from PricewaterhouseCoopers LLP (incorporated herein by reference to Exhibit 23.1 to Form 10-K filed on May 9, 2003) 23.2 Independent Auditors' Consent from Deloitte & Touche LLP (incorporated herein by reference to Exhibit 23.2 to Form 10-K filed on May 9, 2003) (b) Reports on Form 8-K On July 25, 2003, our Company filed a Form 8-K pursuant to which it furnished the SEC with a copy of the July 25, 2003 press release, which announced the Company's financial results for the quarter ended June 14, 2003. The Great Atlantic & Pacific Tea Company, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. Dated: October 17, 2003 By: /s/ Brenda M. Galgano ---------------------------------------- Brenda M. Galgano, Vice President, Corporate Controller (Chief Accounting Officer) Exhibit 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER Section 302 Certification I, Christian W.E. Haub, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic & Pacific Tea Company, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Christian W. E. Haub Date: October 17, 2003 - ------------------------ Christian W. E. Haub Chairman of the Board, President and Chief Executive Officer Exhibit 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Section 302 Certification I, Mitchell P. Goldstein, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic & Pacific Tea Company, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Mitchell P. Goldstein Date: October 17, 2003 - ------------------------- Mitchell P. Goldstein Senior Vice President, Chief Financial Officer Exhibit 32 Certification Accompanying Periodic Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350) The undersigned, Christian W. E. Haub, Chairman of the Board, President and Chief Executive Officer of The Great Atlantic & Pacific Tea Company, Inc. ("Company"), and Mitchell P. Goldstein, Senior Vice President and Chief Financial Officer of the Company, each hereby certifies that (1) the Quarterly Report of the Company on Form 10-Q for the period ended September 6, 2003 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. Dated: October 17, 2003 /s/ Christian W. E. Haub ------------------------ Christian W. E. Haub Chairman of the Board, President and Chief Executive Officer Dated: October 17, 2003 /s/ Mitchell P. Goldstein ------------------------- Mitchell P. Goldstein Senior Vice President, Chief Financial Officer EX-10 3 galgano.txt EX. 10-BRENDA GALGANO EMPLOYMENT AGREEMENT Exhibit 10.9 EMPLOYMENT AGREEMENT AGREEMENT, made and entered into as of the 16th day of June, 2003, by and between THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (the "Company"), and BRENDA GALGANO (the "Employee"). W I T N E S S E T H WHEREAS, the Company and the Employee (the "Parties") have agreed to enter into this agreement (the "Agreement) relating to the employment of the Employee by the Company; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Parties, intending to be legally bound, agree as follows: 1. Term of Employment. (a) The Company agrees to continue to employ the Employee, and the Employee agrees to remain in the employment of the Company, in accordance with the terms and provisions of this Agreement, for the period set forth below (the "Employment Period"). (b) The Employment Period under this Agreement shall commence as of June 16, 2003 and, subject only to the provisions of Sections 7, 8 and 9 below relating to termination of employment, shall continue until (i) the close of business on June 2, 2006 or (ii) such later date as shall result from the operation of subparagraph (c) below (the "Terminal Date"). (c) Commencing on December 16, 2004, and on the first business day of each month thereafter (such date and each such first business day, the "Renewal Date") the Terminal Date set forth in subparagraph (b) above shall be extended so as to occur eighteen months from the Renewal Date unless either the Company or the Employee shall have given written notice to the other Party on or before such Renewal Date that the Terminal Date is not to be extended. 2. Duties. It is the intention of the Parties that during the term of her employment under this Agreement, the Employee will serve as Vice President and Corporate Controller. The Employee will devote her full business time and attention to the affairs of the Company and her duties as its Vice President and Corporate Controller. The Employee will have such duties as are appropriate to her position as Vice President and Corporate Controller, and will have such authority as required to enable her to perform these duties. Consistent with the foregoing, the Employee shall comply with all reasonable instructions of the Senior Vice President & Chief Financial Officer of the Company. The Employee will be based in Montvale, New Jersey and her services will be rendered there except insofar as travel may be involved in connection with her regular duties. The Employee will report directly to the Senior Vice President & Chief Financial Officer of the Company. 3. Salary and Bonus. 3.1 Salary. The Company will pay the Employee a base salary at an initial annual rate of not less than $153,186.15, (One hundred fifty three thousand one hundred eighty six and 15/100) which base salary as in effect from time to time will not be reduced and will be reviewed periodically (at intervals of not more than twelve (12) months) by the Compensation Committee of the Board of Directors (the "Board") for the purpose of considering increases thereof. In evaluating increases in the Employee's base salary, the Compensation Committee of the Board will take into account such factors as corporate performance, individual merit, and such other considerations as it deems appropriate. The Employee's base salary will be paid in accordance with the standard practices for other corporate executives of the Company. 3.2 Bonuses. The Employee will be eligible to receive annually or otherwise any bonus awards, whether payable in cash, shares of common stock of the Company or otherwise, which the Company, the Compensation Committee of the Board or such other authorized committee of the Board determines to award or grant. 3.3 Stay-On Bonus For fiscal year 2003, the Employee will be eligible to receive a year end "stay-on" bonus of $25,000 which would be above and beyond any normal bonus plan payment provided she is employed by the Company on the date all bonuses are paid and she has performed at a "3" or higher level under her '03 performance plan. 4. Benefit Programs. The Employee will receive such benefits and awards, including without limitation stock options and restricted share awards, as the Compensation Committee of the Board shall determine and will be eligible to participate in all employee benefit plans and programs of the Company from time to time in effect for the benefit of senior executives of the Company, including, but not limited to, pension and other retirement plans, group life insurance, hospitalization and surgical and major medical coverages, sick leave, salary continuation arrangements, vacations and holidays, long-term disability, and such other benefits as are or may be made available from time to time to senior executives of the Company. 5. Business Expenses and Perquisites. The Employee will be reimbursed for all reasonable expenses incurred by her in connection with the conduct of the business of the Company, provided she properly accounts therefor in accordance with the Company's policies. She will also be entitled to such other perquisites as are customary for senior executives of the Company who are vice presidents. 6. Office and Services Furnished. The Company shall furnish the Employee with office space, secretarial assistance and such other facilities and services as shall be suitable to the Employee's position and adequate for the performance of her duties hereunder. 7. Termination of Employment by the Company. 7.1 Involuntary Termination by the Company Other Than For Permanent and Total Disability or For Cause. The Company may terminate the Employee's employment at any time and for any reason by giving her a written notice of termination to that effect at least 45 days before the date of termination. In the event the Company terminates the Employee's employment for any reason other than for Permanent and Total Disability, as provided in Section 7.2, below, or for Cause, as provided in Section 7.3, below, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. 7.2 Termination Due to Permanent and Total Disability. If the Employee incurs a Permanent and Total Disability, as defined below, the Company may terminate the Employee's employment by giving her written notice of termination at least 45 days before the date of such termination. In the event of such termination of the Employee's employment because of Permanent and Total Disability, the Employee shall be entitled to receive (i) her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination of employment at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. For purposes of this Agreement, the Employee shall be considered to have incurred a Permanent and Total Disability if she is unable to substantially carry out her duties under this Agreement by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The existence of such Permanent and Total Disability shall be evidenced by such medical certification as the Secretary of the Company shall require and shall be subject to the approval of the Compensation Committee of the Board of Directors of the Company. 7.3 Termination for Cause. The Company may terminate the Employee's employment for Cause if (i) the Employee willfully, substantially, and continually fails to perform the duties for which she is employed by the Company, (ii) the Employee willfully fails to comply with the reasonable instructions of the Senior Vice President & Chief Financial Officer of the Company, (iii) the Employee willfully engages in conduct which is or would reasonably be expected to be materially and demonstrably injurious to the Company, (iv) the Employee willfully engages in an act or acts of dishonesty resulting in material personal gain to the Employee at the expense of the Company, (v) the Employee is convicted of a felony, (vi) the Employee engages in an act or acts of gross malfeasance in connection with her employment hereunder, (vii) the Employee commits a material breach of the confidentiality provision set forth in Section 15, or (viii) the Employee exhibits demonstrable evidence of alcohol or drug abuse having a substantial adverse effect on her job performance hereunder. The Company shall exercise its right to terminate the Employee's employment for Cause by giving her written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Cause. In the event of such termination of the Employee's employment for Cause, the Employee shall be entitled to receive (i) her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits and (ii) any amounts owed under the reimbursement policy of Section 5. 8. Termination of Employment by the Employee. (a) Good Reason. The Employee may terminate her employment for Good Reason by giving the Company a written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Good Reason. In the event of the Employee's termination of her employment for Good Reason, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. For purposes of this Agreement, Good Reason shall mean (i) a significant reduction in the scope of the Employee's authority, functions, duties or responsibilities from that which is contemplated by this Agreement, (ii) the Employee being required to report directly to someone other than the Senior Vice President & Chief Financial Officer of the Company, (iii) the relocation of the Employee's office location to a location more than 50 miles away from the Employee's principal place of employment on June 16, 2003 (iv) any reduction in the Employee's base salary, or (v) a significant reduction in the employee benefits provided to the Employee other than in connection with an across-the-board reduction similarly affecting substantially all senior executives of the Company. If an event constituting a ground for termination of employment for Good Reason occurs, and the Employee fails to give notice of termination within 3 months after the occurrence of such event, the Employee shall be deemed to have waived her right to terminate employment for Good Reason in connection with such event (but not for any other event for which the 3-month period has not expired). (b) Other. The Employee may terminate her employment at any time and for any reason, other than pursuant to subsection "(a) above, by giving the Company a written notice of termination to that effect at least 45 days before the date of termination. In the event of the Employee's termination of her employment pursuant to this subsection (b), the Employee shall be entitled to receive (i) her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. 9. Termination of Employment By Death. In the event of the death of the Employee during the course of her employment hereunder, the Employee's estate shall be entitled to receive (i) her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any other benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. In addition, in the event of such death, the Employee's beneficiaries shall receive any death benefits owed to them under the Company's employee benefit plans. 10. Benefits Upon Termination Without Cause or For Good Reason (No Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, or (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), and (b) such termination of employment does not occur within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee shall be entitled to the following: (a) The Company shall pay to the Employee her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit for each month during the 18 month period beginning with the month next following the date of termination of the Employee's employment an amount equal to one-twelfth of the sum of (i) her annual rate of base salary immediately preceding her termination of employment, and (ii) the average of her three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five calendar years preceding her termination of employment (or, if she was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which she was eligible, and if she was not eligible for such a bonus in any previous year, then 100% of her target annual bonus for the year of termination of her employment), with any deferred bonuses counting for the year earned rather than the year paid. Each such monthly benefit shall be paid no later than the last day of the applicable month. In the event that the Employee dies before the end of such 18-month period, the payments for the remainder of such period shall be made to the Employee's estate. (d) The Company shall pay to the Employee as a bonus for the year of termination of her employment an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the calendar year of termination of the Employee's employment if her employment had not terminated (determined on the basis of her actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to her under the Company's annual management incentive bonus plan for the calendar year immediately preceding the calendar year of the termination of her employment, with deferred bonuses counting for the year earned rather than the year paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such calendar year up to her termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 18 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered her immediately prior to her termination of employment as if she had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 18-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 11. Benefits Upon Termination Without Cause or For Good Reason (Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), or (iii) for any reason during the 30 days beginning on the first anniversary of a Change of Control, and (b) such termination of employment occurs within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee shall be entitled to the following: (a) The Company shall pay to the Employee her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit an amount equal to three (3) times the sum of (i) her annual rate of base salary immediately preceding her termination of employment, and (ii) the average of her three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five calendar years preceding her termination of employment (or, if he was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which he was eligible, and if he was not eligible for such a bonus in any previous year, then 100% of her target annual bonus for the year of termination of her employment), with any deferred bonuses counting for the year earned rather than the year paid. Such severance benefit shall be paid in a lump sum within 45 days after the date of such termination of employment. (d) The Company shall pay to the Employee as a bonus for the year of termination of her employment an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the calendar year of termination of the Employee's employment if her employment had not terminated (determined on the basis of her actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to her under the Company's annual management incentive bonus plan for the calendar year immediately preceding the calendar year of the termination of her employment, with deferred bonuses counting for the year earned rather than the year paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such calendar year up to her termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 36 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered her immediately prior to her termination of employment as if she had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 36-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 12. Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if (a) any person or persons acting together which would constitute a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other than the Company, any subsidiary of the Company, and Tengelmann Warenhandelsgesellschaft KG (a partnership organized under the laws of the Federal Republic of Germany or any successor to such partnership, hereinafter "Tengelmann")) shall beneficially own (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, at least 30% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of the Board and such voting power exceeds the then current voting power of Tengelmann; (b) control of Tengelmann is acquired by any person or persons other than family members or entities controlled by family members of Erivan Haub; (c) Current Directors (as herein defined) shall cease for any reason to constitute at least a majority of the members of the Board (for this purpose, a "Current Director" shall mean any member of the Board as of the date hereof and any successor of a Current Director whose election, or nomination for election by the Company's shareholders, was approved by at least two-thirds of the Current Directors then on the Board); (d) the shareholders of the Company approve (i) a plan of complete liquidation of the Company or (ii) an agreement providing for the merger or consolidation of the Company other than a merger or consolidation in which (x) the holders of the common stock of the Company immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or (y) the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation; or (e) the shareholders of the Company approve an agreement (or agreements) providing for the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company. 13. Entitlement to Other Benefits. Except as otherwise provided in this Agreement, this Agreement shall not be construed as limiting in any way any rights or benefits that the Employee or her spouse, dependents or beneficiaries may have pursuant to any other plan or program of the Company. 14. Non-Competition. The Employee agrees that during the term of this Agreement and for a period of 18 months following termination of her employment, the Employee will not, within any of the geographical areas of the United States or Canada in which the Company is then conducting business (either directly or through franchisees), directly or indirectly, own, manage, operate, control, be employed by, participate in, provide consulting services to, or be connected in any manner with the ownership, management, operation or control of any business similar to any of the types of businesses conducted by the Company to any significant extent during her employment or on the date of termination of her employment, except the Employee may own for investment purposes up to 1% of the capital stock of any company whose stock is publicly traded, and during such two year period following termination of her employment the Employee will not contact or solicit employees of the Company for the purpose of inducing such employees to leave the employ of the Company. 15. Confidential Information and Trade Secrets. The Employee hereby acknowledges that she will have access to and become acquainted with various trade secrets and proprietary information of the Company and other confidential information relating to the Company. The Employee covenants that she will not, directly or indirectly, disclose or use such information except as is necessary and appropriate in connection with her employment by the Company and that she will otherwise adhere in all respects to the Company's policies against the use or disclosure of such information. 16. Arbitration; Injunctive Relief. Any controversy or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof, will be settled by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitration will be held in New York, New York, or such other place as may be agreed upon at the time by the parties to the arbitration. The parties shall bear their own expenses in connection with any arbitration or proceeding arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof; provided, however, that in the event that the Employee substantially prevails, the Company agrees promptly to reimburse the Employee for all expenses (including costs and fees of witnesses, evidence and attorneys fees and expenses) reasonably incurred by her in investigating, prosecuting, defending, or preparing to prosecute or defend any action, proceeding or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof. The parties acknowledge and agree that a breach of Employee's obligations under Sections 14 or 15 could cause irreparable harm to Company for which Company would have no adequate remedy at law, and further agree that, notwithstanding the agreement of the parties to arbitrate controversies or claims as set forth above, the Company may apply to a court of competent jurisdiction to seek to enjoin preliminarily or permanently any breach or threatened breach of the Employee's obligations under Sections 14 and 15. 17. Indemnification. The Company shall indemnify and hold the Employee harmless to the fullest extent legally permissible under the laws of the State of Maryland, against any and all expenses, liabilities and losses (including attorney's fees, judgments, fines and amounts paid in settlement) reasonably incurred or suffered by her by reason of any claim or cause of action asserted against her because of her service at any time as a director or officer of the Company. The Company shall advance to the Employee the amount of her expenses incurred in connection with any proceeding relating to such service to the fullest extent legally permissible under the laws of the State of Maryland. Notwithstanding the foregoing, the Company's obligations pursuant to this Section 17 shall not apply in the case of any claim or cause of action by or in the right of the Company or any subsidiary thereof. 18. Liability Insurance. To the extent that Company maintains a directors and officers liability insurance policy in effect, the Company will take all steps necessary to ensure that the Employee is covered under such policy for her service as a director or officer of the Company or any subsidiary of the Company with respect to claims made at any time with respect to such service. 19. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the accelerated exercisability of any stock option), to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 19) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (or any similar excise tax) or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive from the Company an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any Excise Tax, income tax or employment tax and taking into account any lost or reduced tax deductions on account of such Gross-Up Payment) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Employee retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 19(c), all determinations required to be made under this Section 19, including determination of whether a Gross-Up Payment is required and of the amount of any such Gross-up Payment, shall be made by PricewaterhouseCoopers LLP (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the date of termination of the Employee's employment, if applicable, or such earlier time as is requested by the Company, provided that any determination that an Excise Tax is payable by the Employee shall be made on the basis of substantial authority. The initial Gross-Up Payment, if any, as determined pursuant to this Section 19(b), shall be paid to the Employee within five business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Employee, it shall furnish the Employee with a written opinion that he has substantial authority not to report any Excise Tax on her Federal income tax return. Any determination by the Accounting Firm meeting the requirements of this Section 19(b) shall be binding upon the Company and the Employee; subject only to payments pursuant to the following sentence based on a determination that additional Gross-Up Payments should have been made, consistent with the calculations required to be made hereunder (the amount of such additional payments is referred to herein as the "Gross-Up Underpayment"). In the event that the Company exhausts its remedies pursuant to Section 19(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Underpayment that has occurred and any such Gross-Up Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. The fees and disbursements of the Accounting Firm shall be paid by the Company. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than ten business days after the Employee receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such Claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim and that it will bear the costs and provide the indemnification as required by this sentence, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such payments), including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 19(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such advance), including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section 19(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then any obligation of the Employee to repay such advance shall be forgiven and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 20. No Duty to Seek Employment. The Employee shall not be under any duty or obligation to seek or accept other employment following termination of employment, and no amount, payment or benefits due to the Employee hereunder shall be reduced or suspended if the Employee accepts subsequent employment. 21. Deductions and Withholding. All amounts payable or which become payable under any provision of this Agreement shall be subject to any deductions authorized by the Employee and any deductions and withholdings required by law. 22. Governing Law. The validity, interpretation and performance of this Agreement will be governed by the laws of the State of New Jersey without regard to the conflict of law provisions. 23. Notice. Any written notice required to be given by one Party to the other Party hereunder will be deemed effected if mailed by registered mail: To the Company at: The Great Atlantic & Pacific Tea Company 2 Paragon Drive Montvale, New Jersey 07645 Attention: General Counsel To the Employee at: 334 S. Middletown Road Pearl River, NY 10965 or such other address as may be stated in a notice given as herein before provided. 24. Severability. If any one or more of the provisions contained in this Agreement is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provision hereof. 25. Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the Parties hereto and their personal representatives, and, in the case of the Company, its successors and assigns. To the extent the Company's obligations under this Agreement are transferred to any successor or assign, such successor or assign shall be treated as the "Company" for purposes of this Agreement. Other than as contemplated by this Agreement, the Employee may not assign her rights or duties under this Agreement. 26. Continuing Effect. Wherever appropriate to the intention of the Parties hereto, the respective rights and obligations of the Parties, including the obligations referred to in Sections 10, 11, 14, 15 and 19, hereof, will survive any termination or expiration of the term of this Agreement. 27. Entire Agreement. This Agreement constitutes the entire agreement between the Parties and supersedes any and all other agreements and understandings between the Parties in respect of the matters addressed in this Agreement. 28. Amendment and Waiver. No amendment or waiver of any provision of this Agreement shall be effective, unless the same shall be in writing and signed by the Parties, and then such amendment, waiver or consent shall be effective only in the specific instance or for the specific purpose for which such amendment, waiver or consent was given. 29. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Employee has hereunto set her hand as of the day and year first above written. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. By: Christian W. E. Haub Chairman, President & Chief Executive Officer Accepted: - ------------------------------ Brenda Galgano C :Brenda Galgano -----END PRIVACY-ENHANCED MESSAGE-----