-----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, U4NhobJpe+E+xO9x6xtihkB6BbXjo4S/A811J7Bx9APus8XaYhq3NVYgrAaqirld M4oonL6zs6lXKqXEsb3U6A== 0001125282-04-002476.txt : 20040521 0001125282-04-002476.hdr.sgml : 20040521 20040521165709 ACCESSION NUMBER: 0001125282-04-002476 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040228 FILED AS OF DATE: 20040521 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04141 FILM NUMBER: 04824795 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-K 1 b332049_10k.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 2004 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 its 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) Registrant's telephone number, including area code: 201-573-9700 --------------------------------- Securities registered pursuant to Section 12 (b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- Common Stock - $1 par value New York Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None --------------------------------- 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ X ] No [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of the close of business on September 5, 2003, the registrant's most recently completed second fiscal quarter, was $374,772,531. The number of shares of common stock outstanding as of the close of business on May 20, 2004 was 38,520,530. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part I, Items 1 and 3, and Part II, Items 5, 6, 7, 7A, 8, 9A and 15 are incorporated by reference from the Registrant's Fiscal 2003 Annual Report to Stockholders. The information required by Part II, Items 12, 13 and 14 are incorporated by reference from the Registrant's Proxy Statement. PART I ITEM 1 - Business General - ------- The Great Atlantic & Pacific Tea Company, Inc. ("A&P", "we", "our", "us" or "our Company") is engaged in the retail food business. We operated 633 stores averaging approximately 39,100 square feet per store as of February 28, 2004. In addition, we served as wholesaler to 63 franchise stores in Canada averaging approximately 32,500 square feet per store as of February 28, 2004. On the basis of reported sales for fiscal 2003, we believe that we are among North America's largest retail food chains. Operating under the trade names A&P(R), Super Fresh(R), Sav-A-Center(R), Farmer Jack(R), Waldbaum's(TM), Super Foodmart, Ultra Food & Drug, Dominion(R), Food Basics(R), The Barn Markets(R) and The Food Emporium(R), we sell groceries, meats, fresh produce and other items commonly offered in supermarkets. In addition, many stores have bakery, delicatessen, pharmacy, floral, fresh fish and cheese departments and on-site banking. National, regional and local brands are sold as well as private label merchandise. In support of our retail operations, we sell other private label products in our stores under other brand names of our Company which include without limitation, America's Choice(R), Master Choice(R), Health Pride(R), Savings Plus and The Farm. Building upon a broad base of A&P supermarkets, our Company has historically expanded and diversified within the retail food business through the acquisition of other supermarket chains and the development of several alternative store types. We now operate our stores with merchandise, pricing and identities tailored to appeal to different segments of the market, including buyers seeking gourmet and ethnic foods, a wide variety of premium quality private label goods and health and beauty aids along with the array of traditional grocery products. Modernization of Facilities - --------------------------- We are engaged in a continuing program of modernizing our operations including retail stores, warehousing and distribution facilities, supply and logistics and processes. In support of our modernizing program, on March 13, 2000, we announced our business process initiative, a plan to develop a state of the art supply chain and business management infrastructure over four years. This initiative was completed in fiscal 2002. During fiscal 2003, we expended approximately $135 million for capital projects, which included 19 new supermarkets and 2 major remodels or enlargements. Our Company has planned capital expenditures of approximately $275 to $300 million in fiscal 2004. These expenditures relate primarily to opening 10 to 15 new supermarkets, converting 30 to 35 stores to new formats, and enlarging or remodeling 100 - 125 supermarkets. In addition, we plan to continue with at least similar levels of capital expenditures in fiscal 2005 and several years thereafter. Sources of Supply - ----------------- Our Company obtains the merchandise sold in our stores from a variety of suppliers located primarily in the United States and Canada. Our Company has long-standing and satisfactory relationships with our suppliers. Employees - --------- As of February 28, 2004, we had approximately 74,000 employees, of which 69% were employed on a part-time basis. Approximately 89% of our employees are covered by union contracts. Competition - ----------- The supermarket business is highly competitive throughout the marketing areas served by our Company and is generally characterized by low profit margins on sales with earnings primarily dependent upon rapid inventory turnover, effective cost controls and the ability to achieve high sales volume. We compete for sales and store locations with a number of national and regional chains, as well as with many independent and cooperative stores and markets. Segment Information - ------------------- The segment information required is contained under the caption "Note 15 - Operating Segments" in the Fiscal 2003 Annual Report to Stockholders and is herein incorporated by reference. Foreign Operations - ------------------ The information required is contained under the captions "Management's Discussion and Analysis", "Note 7 - Wholesale Franchise Business", "Note 11 - Income Taxes", "Note 12 - Retirement Plans and Benefits", "Note 14 - Commitments and Contingencies" and "Note 15 - Operating Segments" in the Fiscal 2003 Annual Report to Stockholders and is herein incorporated by reference. ITEM 2 - Properties At February 28, 2004, we owned 84 properties consisting of the following: Stores, Not Including Stores in Owned Shopping Centers ------------------------------------------------------ Land and building owned 20 Building owned and land leased 17 Land owned and building leased 1 ---- Total stores 38 Shopping Centers ---------------- Land and building owned 5 Building owned and land leased 3 ---- Total shopping centers 8 Warehouses ---------- Land and building owned 7 Administrative and Other Properties ----------------------------------- Land and building owned 10 Building owned and land leased 3 Property under development building owned and land leased 2 Property under development land and building owned 1 Property under development land only 2 Undeveloped land 13 ---- Total other properties 31 ---- Total Properties 84 ==== At February 28, 2004, we operated 633 retail stores and serviced 63 franchised stores. These stores are geographically located as follows: Company Stores: -------------- New England States: ------------------ Connecticut 31 ---- Total 31 Middle Atlantic States: ---------------------- District of Columbia 1 Delaware 9 Maryland 31 New Jersey 96 New York 142 Pennsylvania 24 ---- Total 303 Midwestern States: ----------------- Michigan 90 Ohio 6 ---- Total 96 Southern States: --------------- Louisiana 20 Mississippi 4 ---- Total 24 ---- Total United States 454 Ontario, Canada 179 ---- Total Stores 633 ==== Franchised Stores: Ontario, Canada 63 ---- Total Franchised Stores 63 ==== The total area of all of our operated retail stores is 24.7 million square feet averaging approximately 39,100 square feet per store. Excluding liquor and The Food Emporium(R) stores, which are generally smaller in size, the average store size is approximately 41,700 square feet. The total area of all franchised stores is 2.0 million square feet averaging approximately 32,500 square feet per store. The 19 new stores opened in fiscal 2003 consisted of 19 supermarkets and range in size from 19,900 to 63,900 square feet, with an average size of approximately 44,300 square feet. The stores built over the past several years and those planned for fiscal 2004 and thereafter, generally range in size from 40,000 to 60,000 square feet. The selling area of new stores is approximately 73% of the total square footage. As of the end of fiscal 2003, we operated 12 warehouses to service our store network. These warehouses are geographically located as follows: Louisiana 1 Maryland 1 Michigan 2 New Jersey 1 New York 2 Pennsylvania 1 ---- Total United States 8 Ontario, Canada 4 ---- Total Warehouses 12 ==== There was no real estate pledged as collateral for outstanding mortgage loans as of February 28, 2004. The net book value of real estate pledged as collateral for the Company's $400 million Secured Revolving Credit Agreement amounted to $22.8 million as of February 28, 2004. ITEM 3 - Legal Proceedings The information required is contained under the caption "Note 14 - Commitments and Contingencies" in the Fiscal 2003 Annual Report to Stockholders and is herein incorporated by reference. ITEM 4 - Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 2003. PART II ITEM 5 - Market for the Registrant's Common Stock and Related Security Holder Matters The information required is contained under the captions "Summary of Quarterly Results", "Five Year Summary of Selected Financial Data", and "Stockholder Information" in the Fiscal 2003 Annual Report to Stockholders and is herein incorporated by reference. ITEM 6 - Selected Financial Data The information required is contained under the caption "Five Year Summary of Selected Financial Data" in the Fiscal 2003 Annual Report to Stockholders and is herein incorporated by reference. ITEM 7 - Management's Discussion and Analysis The information required is contained under the caption "Management's Discussion and Analysis" in the Fiscal 2003 Annual Report to Stockholders and is herein incorporated by reference. ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk The information required is contained in the section "Market Risk" under the caption "Management's Discussion and Analysis" in the Fiscal 2003 Annual Report to Stockholders and is herein incorporated by reference. ITEM 8 - Financial Statements and Supplementary Data (a) Financial Statements: The financial statements required to be filed herein are described in Part IV, Item 15 of this report. Except for the sections included herein by reference, our Fiscal 2003 Annual Report to Stockholders is not deemed to be filed as part of this report. (b) Supplementary Data: The information required is contained under the caption "Summary of Quarterly Results" in the Fiscal 2003 Annual Report to Stockholders and is herein incorporated by reference. ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure during the fiscal year ended February 28, 2004. ITEM 9A - Controls and Procedures The information required is contained under the caption "Management's Report on Financial Statements" in the Fiscal 2003 Annual Report to Stockholders and is herein incorporated by reference. PART III ITEMS 10 and 11 - Directors and Executive Officers of the Registrant and Executive Compensation The executive officers of our Company are as follows: Name Age Current Position - --------------------------- ------ ------------------------------------ Christian W.E. Haub 39 Chairman of the Board, President and Chief Executive Officer Eric Claus 47 President and Chief Executive Officer, A&P Canada William P. Costantini 56 Senior Vice President, General Counsel & Secretary Brenda M. Galgano 35 Vice President and Corporate Controller Mitchell P. Goldstein 43 Senior Vice President, Chief Financial Officer Peter Johannes Jueptner 41 Executive Vice President, A&P U.S. John E. Metzger 49 Senior Vice President, Chief Information Officer William Moss 56 Vice President and Treasurer Brian Piwek 57 President and Chief Executive Officer, A&P U.S. The executive officers of our Company are chosen annually and serve under the direction of the Chief Executive Officer ("CEO") with the consent of the Board of Directors. Mr. Haub currently serves as Chairman of the Board, President and Chief Executive Officer of our Company. He was elected a director on December 3, 1991, and is Chair of the Executive Committee and a member of the Finance Committee. Mr. Haub served as Chief Operating Officer of our Company from December 7, 1993, becoming Co-Chief Executive Officer on April 2, 1997, sole CEO on May 1, 1998 and Chairman of the Board on May 1, 2001. In addition to his other positions, with the exception of the period between February 2002 through October 2002, Mr. Haub has served as President of our Company since December 7, 1993. Mr. Haub, son of Helga Haub, is a partner and Co-Chief Executive Officer of Tengelmann Warenhandelsgesellschaft KG, a partnership organized under the laws of the Federal Republic of Germany ("Tengelmann"). Mr. Haub is on the Board of Directors of the Food Marketing Institute and on the Board of Trustees of St. Joseph's University in Philadelphia, Pennsylvania. Mr. Claus was appointed President & Chief Executive Officer, A&P Canada on November 11, 2002. Prior to joining our Company, Mr. Claus served as Chief Executive Officer of Co-Op Atlantic, between February 1997 and November 2002. Mr. Costantini was elected Senior Vice President, General Counsel & Secretary effective April 24, 2000. Prior to joining our Company, Mr. Costantini served as Executive Vice President & General Counsel and Senior Vice President & General Counsel of Olsten Corporation, between June 1992 and March 2000. Ms. Galgano was appointed Vice President, Corporate Controller on February 24, 2002. Ms. Galgano served as Assistant Corporate Controller of our Company from July 2000 to February 2002 and Director of Corporate Accounting from October 1999 to July 2000. Prior to joining our Company, Ms. Galgano was with PricewaterhouseCoopers from July 1997 to July 1999 as Senior Manager and Manager of the Audit and Business Advisory Services Group. Mr. Goldstein was elected Senior Vice President & Chief Financial Officer on February 24, 2002. From January 2000 to February 24, 2002, Mr. Goldstein was Senior Vice President, Finance & Treasurer of our Company. Prior to joining our Company, Mr. Goldstein was Chief Financial Officer from October 1998 to January 2000 and Vice President of Strategic Planning and Corporate Development from September 1997 to October 1998 at Vlasic Foods International. Before that, he was Director of Strategic Planning at the Campbell Soup Company. Vlasic Foods International filed a petition under the Federal bankruptcy laws in January 2001. Mr. Goldstein is on the Board of Advisers of the Rutgers Business School. Mr. Jueptner was appointed Executive Vice President, A&P U.S. on November 15, 2002. Prior to that, Mr. Jueptner served as Senior Vice President, Chief Strategy Officer from October 1, 2002 to November 15, 2002. Prior to joining our Company, Mr. Jueptner was Chief Commercial Officer of The Worldwide Retail Exchange from December 2000 through July 2002. From 1997 through 2000, Mr. Jueptner held various positions with Campbell Soup Company, lastly, General Manager, Beverages & Latin America. Mr. Metzger was appointed Senior Vice President, Chief Information Officer on February 11, 2002. Prior to that, he was Senior Vice President and Business Process Initiative Business Leader from May 2001 to February 2002, and Vice President, Supply & Logistics from October 1999 to May 2001. Prior to joining our Company, Mr. Metzger was Senior Vice President of CS Integrated LLC from January 1998 to October 1999 and before that, Vice President, Distribution & Procurement for General Mills Restaurants, Inc. from October 1993 to November 1997. Mr. Metzger is a director of the Institute for Standards & Collaboration Commerce, Inc. Mr. Moss was appointed Vice President, Treasurer on February 24, 2002. Prior to that Mr. Moss was Vice President, Treasury Services and Risk Management from 1992 to February 2002. Mr. Piwek was appointed President and Chief Executive Officer, A&P U.S. on October 28, 2002. Prior to that, he was Chairman, President and Chief Executive Officer of The Great Atlantic & Pacific Company of Canada, Limited from April 1, 2002 and was Vice Chairman, President and Chief Executive Officer of The Great Atlantic & Pacific Company of Canada, Limited from February 2000. Before that, Mr. Piwek was Vice Chairman and Co-Chief Executive Officer of The Great Atlantic & Pacific Company of Canada, Limited from October 1997. Prior to joining the Company, he was President of Overwaitea Food Group, a retailer and franchisor in British Columbia and Alberta, Canada. The information required regarding our directors, executive compensation and our beneficial ownership reporting compliance is contained under the captions "Election of Directors", "Executive Compensation" and "Section 16(a) Beneficial Ownership Reporting Compliance", respectively, in the Proxy Statement for our 2004 Annual Meeting of Stockholders, to be filed on or about May 24, 2004 ("Proxy Statement"), and is herein incorporated by reference. Audit Committee Financial Expert - -------------------------------- The Board has determined that each member of the Audit Committee is independent in accordance with the NYSE listing rules, the Company's Standards of Independence and Rule 10A-3 of the Exchange Act. In addition, the Board has determined that each member of the Audit Committee qualifies as an "audit committee financial expert," as defined by the SEC. Code of Business Conduct and Ethics - ----------------------------------- Our Company has adopted a Code of Business Conduct and Ethics applicable to all employees. This Code is applicable to Senior Financial Executives including the chief executive officer, chief financial officer and chief accounting officer of our Company. A&P's Code of Business Conduct and Ethics is available on the Company's Web site at www.aptea.com under "Corporate Governance" and as Exhibit 14 to this Form 10-K. Our Company intends to post on its web site any amendments to, or waivers from, its Code of Business Conduct and Ethics applicable to Senior Financial Executives. ITEM 12 - Security Ownership of Certain Beneficial Owners and Management Beneficial Ownership of More than 5% of the Company's Common Stock The information required is contained in our Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management", and is herein incorporated by reference. ITEM 13 - Certain Relationships and Related Transactions The information required is contained in our Proxy Statement under the heading "Certain Relationships and Transactions", and is herein incorporated by reference. ITEM 14 - Principal Accounting Fees and Services The information required is contained in our Proxy Statement under the heading "Independent Public Accountants", and is herein incorporated by reference. PART IV ITEM 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this report. 1) Financial Statements: The financial statements required by Item 8 are included in the Fiscal 2003 Annual Report to Stockholders. The following required items are herein incorporated by reference: Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Accountants 2) Financial Statement Schedules are omitted because they are not required or do not apply, or the required information is included elsewhere in the Consolidated Financial Statements or Notes thereto. 3) Exhibits: The following are filed as Exhibits to this Report: 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 16th day of June, 2003, by and between our Company and Brenda Galgano (incorporated herein by reference to Exhibit 10.9 to Form 10-Q filed on October 17, 2003) 10.5 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) 10.6 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 October 22, 2002) 10.7 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) 10.8 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) 10.9 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) 10.10 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) 10.25 Amended and Restated Credit Agreement dated as of February 23, 2001 and amended and restated as of December 4, 2003, among our Company, The Great Atlantic & Pacific Company of Canada, Limited and the other Borrowers party hereto, as Borrowers, and the Lenders party hereto, and JPMorgan Chase Bank, as U.S. Administrative Agent and U.S. Collateral Agent, and JPMorgan Chase Bank, Toronto Branch, as Canadian Administrative Agent and Canadian Collateral Agent (incorporated herein by reference to Exhibit 10.25 to Form 10-Q filed on January 9, 2004) 13* Fiscal 2003 Annual Report to Stockholders 14* Code of Business Conduct and Ethics 16 Letter on Change in Certifying Accountant (incorporated herein by reference to Forms 8-K filed on September 18, 2002 and September 24, 2002, and Form 8-K/A filed on September 24, 2002) 21* Subsidiaries of Registrant 23* Consent of Independent Accountants from PricewaterhouseCoopers LLP 31.1* Certification of the Chief Executive Officer Pursuant Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of the Chief Financial Officer Pursuant Section 302 of the Sarbanes-Oxley Act of 2002 32* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Filed with this 10-K (b) Reports on Form 8-K On January 9, 2004, our Company filed a Form 8-K pursuant to which it furnished the SEC with a copy of the January 9, 2004 press release, which announced the Company's financial results for the quarter ended November 29, 2003. On February 27, 2004, our Company filed a Form 8-K pursuant to which it furnished the SEC with a copy of a February 27, 2004 press release, which announced our Company's completion of a real estate sale leaseback transaction with Cardinal Capital Partners, Inc. (Dallas, Texas), resulting in proceeds to our Company of approximately $170 million. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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. (registrant) Date: May 21, 2004 By: /s/ Mitchell P. Goldstein ----------------------------------------------- Mitchell P. Goldstein, Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and as of the date indicated. /s/ Christian W.E. Haub Chairman of the Board, President and - ------------------------------------ Chief Executive Officer Christian W.E. Haub /s/ John D. Barline Director - ------------------------------------ John D. Barline /s/ Jens-Jurgen Bockel Director - ------------------------------------ Jens-Jurgen Bockel /s/ Bobbie A. Gaunt Director - ------------------------------------ Bobbie A. Gaunt /s/ Helga Haub Director - ------------------------------------ Helga Haub /s/ Dan P. Kourkoumelis Director - ------------------------------------ Dan P. Kourkoumelis /s/ Edward Lewis Director - ------------------------------------ Edward Lewis /s/ Richard L. Nolan Director - ------------------------------------ Richard L. Nolan /s/ Maureen B. Tart-Bezer Director - ------------------------------------ Maureen B. Tart-Bezer The above-named persons signed this report on behalf of the registrant on May 21, 2004. /s/ Brenda M. Galgano Vice President, Corporate Controller - ------------------------------------ Brenda M. Galgano May 21, 2004 EX-13 2 b332049ex_13.txt FISCAL 2003 ANNUAL REPORT TO STOCKHOLDERS The Great Atlantic & Pacific Tea Company, Inc. Fiscal 2003 Annual Report to Stockholders Table of Contents CEO Letter to Stockholders........................................... 3 Management's Discussion and Analysis................................. 6 Consolidated Statements of Operations................................ 42 Consolidated Statements of Stockholders' Equity And Comprehensive (Loss) Income............................... 43 Consolidated Balance Sheets.................... ..................... 44 Consolidated Statements of Cash Flows................................ 45 Notes to Consolidated Financial Statements........................... 46 Management's Report on Consolidated Financial Statements ............ 90 Report of Independent Accountants.................................... 91 Five Year Summary of Selected Financial Data......................... 92 Executive Officers................................................... 94 Board of Directors................................................... 94 Stockholder Information.............................................. 95 Company Profile The Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "our Company"), based in Montvale, New Jersey, operates combination food and drug stores, conventional supermarkets and limited assortment food stores in 10 U.S. states, the District of Columbia and Ontario, Canada, under the A&P(R), Waldbaum's(TM), Super Foodmart, The Food Emporium(R), Super Fresh(R), Farmer Jack(R), Sav-A-Center(R), Dominion(R), Ultra Food & Drug, Food Basics(R) and The Barn Markets(R) trade names. CEO LETTER TO STOCKHOLDERS - -------------------------- To Our Stockholders: Fiscal 2003 was a pivotal year of transition for A&P, in which we took decisive actions to build a solid platform for the turnaround of our business. Although we have not yet restored profitability, we took critical steps toward that goal by restructuring our organization, improving our cost structure and financial position, reversing the negative trend of our U.S. business and maintaining the profitability of our Canadian operations. The stabilization of the U.S. business following a serious decline the previous year, and our continued profitability in Canada despite difficult economic and competitive conditions, underlined the effectiveness of the new operating structure and leadership we installed in the latter part of fiscal 2002. In addition to empowering new and experienced operating leadership, our establishment of the A&P U.S. and A&P Canada business units improved efficiency by eliminating redundant positions and unnecessary operating layers. Combined with our Company-wide focus on expense reduction, this resulted in a decrease of administrative costs. We strengthened our balance sheet and overall financial position in fiscal 2003, generating approximately $425 million in proceeds through the divestiture of non-strategic retail operations in northern New England and Wisconsin and the Eight O'Clock Coffee business, and sale/leaseback transactions involving Company properties. These difficult decisions were necessary to ensure the Company's ongoing viability, and enable A&P U.S. management to focus attention and resources on the turnaround of its retail businesses. That focus, and a strong emphasis on operating and customer service fundamentals, enabled A&P U.S. to halt the previous decline of its top and bottom line results, and meet or exceed internal operating targets throughout the year. A specific priority in 2003 was the revitalization of the Farmer Jack operations in Michigan and Ohio. Last June marked the relaunch of that banner with heightened emphasis on fresh foods, customer service and better pricing, and the addition of several new and remodeled stores. Customer response has been enthusiastic, and results thus far are on track. Another key objective was the fine-tuning of our discount Food Basics concept for expansion beyond our test markets in metropolitan New York and Philadelphia. That process, completed in 2003, resulted in the successful opening of 10 Food Basics units in the Detroit market on March 30, 2004. The powerful consumer franchise and strong operations of A&P Canada were tested in fiscal 2003, as the SARS outbreak, Mad Cow disease concern and other events played havoc with Canada's tourism industry and overall economy for most of the year. Despite those challenges, the Canadian Company delivered another solid profit performance. The refinement of our two-tier marketing offer in Ontario continued in 2003. Evolving mainstream stores emphasizing superior fresh and prepared food offerings emerged under the Dominion and A&P banners; while the no frills Food Basics stores, well established in Ontario over the past several years, further sharpened their discount impact to meet competition. The customer appeal of those formats, sound merchandising and operating execution and aggressive cost management enabled us to succeed last year despite the turbulence of the Ontario marketplace. In summary, despite our poor results in absolute terms, we did achieve all of our strategic objectives for fiscal 2003. Given our previous trend and the nature of the economic and competitive landscape, we did not expect full recovery within the year. Rather our aim was to lay the groundwork for turnaround of the Company. That mission was successfully accomplished. Going forward, our near-term expectations are conservative, due to the considerable work still ahead of us in turning our business around and the continued weakness of some leading economic indicators. However in terms of our ultimate prospect for recovery, I remain confident for several reasons. One is the fundamental operating improvement achieved across our U.S. banners in fiscal 2003. Our positive comparable store sales trend underlined vital progress not yet reflected on our bottom line, but clearly noted by our customers. This was confirmed by the results of objective, third party shopper surveys conducted in our stores all year, and also by our high customer ratings in an independent shopper satisfaction study published by a national trade journal, which included major competitors in most of our markets. Secondly, last year's successful financial initiatives and operating improvements will enable us to resume meaningful capital investment in the business in 2004. This will accelerate the improvement of our store facilities, and enable us to take advantage of unique opportunities, such as our recent agreement to purchase four stores in New Orleans to expand our Sav-A-Center operation. Third is the developing impact of our supply chain and business process infrastructure. This critical information platform will be instrumental in the improvement of our distribution, category management, merchandising and store operations. We anticipate substantial benefits as we fully utilize these advanced tools to deliver the best possible offer to our customers, at the lowest possible cost to the Company. Last but certainly not least is the commitment and capability of our people at all levels, demonstrated throughout the year even as we challenged them with significant changes in the structure and scope of the organization. A dramatic illustration was their exemplary performance during the massive power blackout last August that affected the majority of our operations, some for several days. Under those difficult circumstances, our people worked diligently to maintain food safety, serve customer needs however possible, and swiftly reestablish normal operations once power was restored. More than any other factor, people are driving the recovery and renewal of our business. Their commitment to our customers and our Company solidifies my belief that A&P will persevere, and prevail. In closing, I salute all of our associates for their dedication and hard work throughout fiscal 2003, and also extend sincere thanks to our customers, suppliers and investors for their continuing support. Christian Haub Chairman of The Board, President & Chief Executive Officer The Great Atlantic & Pacific Tea Company, Inc. Management's Discussion and Analysis INTRODUCTION - ------------ The following Management's Discussion and Analysis is intended to help the reader understand the financial position, operating results, and cash flows of The Great Atlantic and Pacific Tea Company, Inc. It should be read in conjunction with our financial statements and the accompanying notes ("Notes"). It discusses matters that Management considers relevant to understanding the business environment, financial position, results of operations and our Company's liquidity and capital resources. These items are presented as follows: o Basis of Presentation - a discussion of our Company's fiscal year-end. o Overview -- a general description of our business; the value drivers of our business; measurements; opportunities; challenges and risks; and initiatives. o 2004 Outlook -- a discussion of certain trends or business initiatives for the upcoming year that Management wishes to share with the reader to assist in understanding the business. o Review of Operations and Liquidity and Capital Resources - a discussion of results for fiscal 2003 and 2002, significant business initiatives, current and expected future liquidity and the impact of various market risks on our Company. o Market Risk - a discussion of the impact of market changes on our consolidated financial statements. o Critical Accounting Estimates - a discussion of significant estimates made by Management. o Impact of New Accounting Pronouncements - a discussion of authoritative pronouncements that have been or will be adopted by our Company. BASIS OF PRESENTATION - --------------------- Our fiscal year ends on the last Saturday in February. Fiscal 2003 ended February 28, 2004, fiscal 2002 ended February 22, 2003 and fiscal 2001 ended February 23, 2002. Fiscal 2003 was comprised of 53 weeks, and fiscal 2002 and fiscal 2001 were each comprised of 52 weeks. Except where noted, all amounts are presented in millions, and all net income (loss) per share data presented is both basic and diluted. OVERVIEW - -------- The Great Atlantic & Pacific Tea Company, Inc., based in Montvale, New Jersey, operates conventional supermarkets, combination food and drug stores and discount food stores in 10 U.S. states, the District of Columbia, and Ontario, Canada. Our Company's business consists of retail grocery operations, which include 633 directly managed stores and 63 franchised stores as of February 28, 2004. Operations are managed by two strategic business units ("SBUs") within the Company, A&P U.S. and A&P Canada, which are supported by central corporate functions. The chief executives of both SBUs, and the executives leading corporate functions, report directly to the Chairman of the Board, President & Chief Executive Officer of our Company. o A&P U.S., based in Paterson, New Jersey, oversees all operations in the United States. Our conventional operations include the A&P, Waldbaum's and Food Emporium banners, which serve Metro New York, Super Fresh, which serves Philadelphia and Baltimore, Farmer Jack, which serves the greater Detroit area and Sav-A-Center, which serves the New Orleans area. We also operate the Food Basics discount banner in several of our areas. The stores are supported by eight regional distribution centers located in the various markets in which we operate. o A&P Canada, based in Toronto, Ontario, oversees operations across Ontario, with stores operating under the A&P, Dominion, Food Basics, Ultra Food & Drug and The Barn Market banners. A&P Canada also serves as a franchisor to certain Food Basics stores in Ontario. The stores are supported by four distribution centers. Fiscal 2003 was a year of transition for our Company, as the first full year operating under the current organizational structure, which was implemented in the latter part of fiscal 2002. In addition to creating the two SBUs, we installed new leadership in both units, positioned experienced operating management closer to the retail businesses, and shifted selected support functions from the Corporate organization into the business units. Key initiatives were implemented during Fiscal 2003 along three major fronts: 1. Fortifying our Company's financial condition; 2. Halting the declining trend in our U.S. operations; and, 3. Strengthening our already-profitable Canadian operations. Specific actions and outcomes were as follows: o Fortifying our Company's financial condition: We generated approximately $425 million in net cash proceeds during Fiscal 2003 through an asset divestiture program which led to the sale of store operations in New England and Wisconsin and the Eight O'Clock Coffee business as well as sale-leaseback transactions involving a number of our properties. Financially, completing these sales enabled us to reduce our debt burden and increase liquidity; managerially, they enabled us to devote resources and attention to the businesses with the best potential for profitable growth. o In addition, we extended and amended our senior secured revolving credit facility, putting in place a new $400 million facility to provide an additional 2-1/2 years of term, until December 2007. The amended facility also provides our Company with greater operating flexibility, and makes possible increased capital spending which we believe is a necessary part of our turnaround. o Further, our Company-wide emphasis on cost reduction resulted in lower overall administrative expenses as a percentage of sales. In addition to heightened awareness and enforcement of cost control disciplines throughout the organization, specific expense reduction measures included a general administrative salary and hiring freeze in our Corporate office and across the U.S. business, which remained in effect throughout fiscal 2003. o We also continued to develop and expand our Strategic Sourcing program. This chainwide system for the purchase of supplies, equipment and services needed to operate the business has generated approximately $40 million in savings to our Company over the past three years. o Halting the decline in our US operations: The A&P U.S. business unit made substantial progress in the effort to turn its operations around and restore a profitable growth trend. Through tighter management of results against budgeted targets, more disciplined merchandising and promotional activity and heightened emphasis of store operating and customer service fundamentals, management was able to stabilize the business in the first half of fiscal 2003. The improvement trend built steadily through the second half, resulting in comparable store sales and operating profit results that exceeded internal targets for the year. o Two specific operating initiatives were afforded highest priority by the U.S. business in fiscal 2003 - the turnaround of the Farmer Jack operations in Michigan and Ohio, and preparation of the discount Food Basics concept for expansion throughout the U.S. operating territories. o Farmer Jack: In June of 2003, we relaunched Farmer Jack with a new merchandising and marketing campaign emphasizing fresh foods, customer service and better pricing. Those improvements have begun to generate growth in sales and customer count, reversing the previous decline of Farmer Jack's leading share of the Detroit market. Thus far, results are consistent with expectations, though we continue to have more progress to make to restore a sufficient level of profitability. o Food Basics: The Company's U.S. discount Food Basics format continued to evolve last year, moving from test mode to the beginning of a gradual roll-out in our operating territories. We made changes in merchandising and product mix, daily store operations and banner leadership to prepare for a growth-oriented future. Food Basics, pioneered by our Company in Ontario several years ago, has undergone extensive evaluation and refinement in test locations in metropolitan New York and New Jersey and in Philadelphia over the past two years. That process was completed in fiscal 2003 and has since resulted in the successful opening of 10 Food Basics units in the Detroit market on March 31, 2004. o Other banners: Our other banners in the U.S. also stabilized during Fiscal 2003. In particular, our Super Fresh banner maintained its prior year trend of relatively rapid comparable store sales growth and improved profit performance. We believe the performance of our A&P, Waldbaum's and The Food Emporium banners will also provide a solid base for improvement initiatives we plan for Fiscal 2004 and beyond. o During Fiscal 2003, A&P U.S. began to more fully use the capabilities we built during the Supply Chain and Business Process initiative which we completed in 2002. Our managers are now able to take better advantage of advanced supply and logistics, category management, merchandising and store operations tools and systems. Our Company is now positioned to more fully leverage purchasing scale, drive operating efficiency and enhance store product assortments throughout the U.S. and Canada. o Strengthening our already-profitable Canadian operations: A&P Canada delivered a solid performance in fiscal 2003, despite the detrimental impact of the SARS and Mad Cow Disease issues on Ontario's economy, and the intense competitive environment that resulted. Our Company's results were aided by management's response to these challenges, with aggressive cost containment, and tight adherence to marketing and merchandising strategies that produced profit without sacrificing critical market share. o Further, A&P Canada continued to refine and develop its marketing, by further elevating the quality and appeal of its fresh and prepared food offers, while also sharpening the low cost, discount Food Basics stores. These activities provide a good base for maintaining profitability in 2004, despite a continuing challenging competitive environment. In particular, we continued to evolve our leading-edge fresh store merchandising and product mix, in our Dominion, A&P and The Barn Markets banners, and we made changes to our Food Basics stores and merchandising program, already well established, to reflect the changed environment. 2004 OUTLOOK - ------------ We believe that the financial and operating improvements we achieved in Fiscal 2003 strengthen our potential to improve profitability in the face of a difficult market environment. We have taken a conservative outlook with regard to results in fiscal 2004, based on both external and internal factors. Externally, despite some positive signs regarding the economy overall, we remain concerned that the indicators that traditionally impact food retailers, most notably employment and new job creation forecasts, in both the U.S. and Canada, do not provide a basis for significant increases in consumer optimism in the foreseeable future. Internally, a primary consideration is the turnaround of the U.S. business, which remains a work in progress. A return to profitability is our chief objective, but we recognize that achieving that result requires long range success of the Farmer Jack initiative, substantive improvements throughout all the U.S. banner operations, and successful development of a sizeable Food Basics offering. We expect, over the course of the year, that we will continue to see sustained progress on each of these initiatives. Moreover, as a catalyst for those improvements, our Company's strategic plan calls for a substantially increased capital investment in the store network compared to the level of recent years. Although this is a positive and encouraging development made possible by last year's financial initiatives and operating improvements, it nevertheless represents reinvestment in the business that is likely to affect profitability and cash flow for several years. Our Company's key focal points and objectives for fiscal 2004 are parallel to those of Fiscal 2003, as follows: o In the U.S., continue to strengthen each conventional banner, behind stronger marketing, merchandising and store operations; and gradually rollout the Food Basics discount banner; o In Canada, enhance an already strong operating and market position; and o Centrally, maintain our strong liquidity with continued focus on cash flow generation and efficient support operations. REVIEW OF 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. Both the discussion and analysis that follows focus on continuing operations. FISCAL 2003 COMPARED WITH FISCAL 2002 - ------------------------------------- OVERALL - ------- Sales for fiscal 2003 were $10.8 billion, compared with $10.1 billion for fiscal 2002; comparable store sales, which include stores that have been in operation for two full fiscal years and replacement stores, increased 0.9%. Net loss per share for fiscal 2003 was $3.82 compared to a net loss per share of $5.03 for fiscal 2002, a decrease of $1.21 per share.
Favorable / Fiscal 2003 Fiscal 2002 (Unfavorable) % Change --------------- --------------- ------------------- ---------------- Sales $ 10,812.5 $ 10,096.8 $ 715.7 7.1% Increase in same store sales 0.9% 0.4% NA NA Loss from continuing operations (211.3) (201.1) (10.2) (5.1) Income from discontinued operations 64.3 7.6 56.7 NM Net loss (147.0) (193.5) 46.5 24.0 Net loss per share (3.82) (5.03) 1.21 24.1 NM = not meaningful
Included in our results for fiscal 2003 was a $37.7 million charge ($0.98 per share) relating to our Farmer Jack restructuring program as described in Notes 3 and 4 of our Consolidated Financial Statements, a $4.2 million net gain ($0.11 per share) relating to reversals of previously accrued vacancy related costs as described in Note 4 of our Consolidated Financial Statements, and a $60.1 million charge ($1.56 per share) relating to our Farmer Jack goodwill and long-lived asset impairments as described in Note 3 of our Consolidated Financial Statements. The following table details the adjustments from "as reported" to "as adjusted" results for fiscal 2003:
Fiscal 2003 Fiscal 2002 -------------------------------------------------------------------- --------------- Adjustments to be (added) subtracted -------------------------------- Goodwill/ Fiscal 2003 Asset long-lived Fiscal 2003 Fiscal 2002 results as disposition asset results as results as (In Millions) reported initiative impairment adjusted adjusted ---------------- --------------- --------------- --------------- --------------- Sales $ 10,812.5 $ - $ - $ 10,812.5 $ 10,096.8 Cost of merchandise sold (7,882.7) (2.2) - (7,880.5) (7,250.0) ---------------- ---------------- --------------- ----------------- ------------ Gross margin 2,929.8 (2.2) - 2,932.0 2,846.8 Rate to sales 27.10% 27.12% 28.19% Store operating, general and administrative expense (3,098.3) (31.3) (60.1) (3,006.9) (2,860.8) Rate to sales 28.65% 27.81% 28.33% ---------------- --------------- --------------- --------------- -------------- Loss from operations (168.5) (33.5) (60.1) (74.9) (14.0) Interest expense (81.8) - - (81.8) (84.7) Interest income 7.3 - - 7.3 7.9 ---------------- --------------- --------------- --------------- -------------- Loss from continuing operations before income taxes (243.0) (33.5) (60.1) (149.4) (90.8) Benefit from income taxes 31.7 - - 31.7 0.6 ---------------- --------------- --------------- --------------- -------------- Loss from continuing operations (211.3) (33.5) (60.1) (117.7) (90.2) Discontinued operations: (Loss) income from operations of discontinued businesses, net of tax (30.2) - - (30.2) 7.6 Gain on disposal of discontinued operations, net of tax 94.5 - - 94.5 - ---------------- --------------- --------------- --------------- -------------- Income from discontinued operations 64.3 - - 64.3 7.6 ---------------- --------------- --------------- ---------------- -------------- Net loss $ (147.0) $ (33.5) $ (60.1) $ (53.4) $ (82.6) ================ =============== =============== ================ ==============
The following table details the adjustments from "as reported" to "as adjusted" results for fiscal 2002:
Fiscal 2002 ------------------------------------------------------------------------------------------ Adjustments to be (added) subtracted ----------------------------------------------------------- Gain on proceeds from the Gain on demutual- Fiscal early Deferred ization Fiscal 2002 Asset extinguish- tax asset of a mutual 2002 results as disposition ment valuation insurance results as (In Millions) reported initiative of debt allowance company adjusted ------------- ------------- ------------- ---------- ------------- ------------- Sales $ 10,096.8 $ - $ - $ - $ - $ 10,096.8 Cost of merchandise sold (7,251.3) (1.3) - - - (7,250.0) -------------- ------------- ------------- ---------- ------------ --------------- Gross margin 2,845.5 (1.3) - - - 2,846.8 Rate to sales 28.18% 28.19% Store operating, general and administrative expense (2,839.2) 7.7 12.2 - 1.7 (2,860.8) Rate to sales 28.12% 28.33% ------------- ------------- ------------- ------------- ------------- -------------- Income (loss) from operations 6.3 6.4 12.2 - 1.7 (14.0) Interest expense (84.7) - - - - (84.7) Interest income 7.9 - - - - 7.9 ------------- ------------- ------------- ------------- ------------- -------------- (Loss) income from continuing operations before income taxes (70.5) 6.4 12.2 - 1.7 (90.8) (Provision for) benefit from income taxes (130.6) 3.2 0.3 (134.0) (0.7) 0.6 --------------- ----------- ------------- ------------ ------------- ------------- (Loss) income from continuing operations (201.1) 9.6 12.5 (134.0) 1.0 (90.2) Discontinued operations: Income from operations of discontinued businesses, net of tax 7.6 - - - - 7.6 Gain on disposal of discontinued operations, net of tax - - - - - - ------------- ------------- ------------- ------------- ------------- ------------- Income from discontinued operations 7.6 - - - - 7.6 ------------- ------------- ------------- ------------- ------------- ------------- Net loss $ (193.5) $9.6 $12.5 $(134.0) $ 1.0 $ (82.6) ============= ============= ============= ============= ============= ==============
SALES - ----- Sales for fiscal 2003 of $10.8 billion increased $715.7 million or 7.1% from sales of $10.1 billion for fiscal 2002. The higher sales were due to an increase in U.S. Retail sales of $136.0 million, an increase in Canada Retail sales of $478.4 million, and an increase in Canada Wholesale sales of $101.3 million. The increase in Canadian sales was primarily due to the favorable impact of the Canadian exchange rate. The following table presents sales for each of our operating segments for fiscal 2003 and fiscal 2002:
Fiscal 2003 Fiscal 2002 Inc (Dec) % Change ----------------- ----------------- -------------------- ---------------- U.S. Retail $ 7,563.0 $ 7,427.0 $ 136.0 1.8% Canada Retail 2,435.7 1,957.3 478.4 24.4 Canada Wholesale 813.8 712.5 101.3 14.2 ----------------- ----------------- -------------------- ---------------- Total $ 10,812.5 $ 10,096.8 $ 715.7 7.1% ================= ================= ==================== ================
The following details the dollar impact of several items affecting the increase in sales by operating segment from fiscal 2002 to fiscal 2003:
Impact of Impact of Foreign Comparable Impact of New Closed Exchange Sales Store 53rd Stores Stores Rate Volume Sales Week Total ------------- ------------- -------------- ------------- ------------- ----------- ------------- U.S. Retail $ 51.9 $ (83.2) $ - $ - $ 34.7 $ 132.6 $ 136.0 Canada Retail 106.5 (28.7) 305.5 - 48.2 46.9 478.4 Canada Wholesale - - 100.8 (14.8) - 15.3 101.3 ------------- ------------- -------------- ------------- ------------- ------------- --------- Total $ 158.4 $ (111.9) $ 406.3 $ (14.8) $ 82.9 $ 194.8 $715.7 ============= ============= ============== ============= ============= ============= ==========
The increase in U.S. Retail sales was primarily attributable to the opening of 28 stores since the beginning of fiscal 2002, of which 10 were opened in fiscal 2003, increasing sales by $51.9 million, the increase in comparable store sales for fiscal 2003 on a 52 week basis of 0.5% as compared to fiscal 2002, and the favorable impact of the 53rd week included in fiscal 2003 which increased sales by $132.6 million. These increases were partially offset by the closure or sale of 108 stores since the beginning of 2002, of which 75 were closed or sold in 2003, decreasing sales by $83.2 million. Included in the 108 stores closed or sold since the beginning of fiscal 2002 were 21 stores closed as part of the asset disposition initiative as discussed in Note 4 of our Consolidated Financial Statements. The increase in Canada Retail sales was primarily attributable to the opening or transfer from franchise operations of 22 stores since the beginning of fiscal 2002, of which 9 were opened in fiscal 2003, increasing sales by $106.5 million, the favorable effect of the Canadian exchange rate, which increased sales by $305.5 million, the increase in comparable store sales for fiscal 2003 on a 52 week basis of 2.0% as compared to fiscal 2002, and the favorable impact of the 53rd week included in fiscal 2003 which increased sales by $46.9 million. These increases were partially offset by the closure of 19 stores since the beginning of 2002, of which 10 were closed in 2003, decreasing sales by $28.7 million. The increase in Canada Wholesale sales was attributable to the favorable effect of the Canadian exchange rate of $100.8 million and the favorable impact of the 53rd week included in fiscal 2003, which increased sales by $15.3 million, partially offset by lower sales volume of $14.8 million as we converted several stores from franchise to corporate operations. Average weekly sales per supermarket for U.S. Retail were approximately $332,100 for fiscal 2003 versus $320,500 for the corresponding period of the prior year, an increase of 3.6% due primarily to higher comparable store sales. Average weekly sales per supermarket for Canada Retail were approximately $259,600 for fiscal 2003 versus $222,000 for the corresponding period of the prior year, an increase of 16.9%. This increase was primarily due to the increase in the Canadian exchange rate and higher comparable store sales. GROSS MARGIN - ------------ The following table presents gross margin dollar results and gross margin as a percentage of sales by operating segment for fiscal 2003 as compared to fiscal 2002. Gross margin as a percentage of sales decreased 108 basis points to 27.10% for fiscal 2003 from 28.18% for fiscal 2002. This 108 basis point decrease was caused by continued competitive pressures to drive sales volume and protect market share in the current market.
Fiscal 2003 Fiscal 2002 -------------------------------------------- -------------------------------------------- Gross Margin Rate to Sales% Gross Margin Rate to Sales% ------------ -------------- ------------ -------------- U.S. Retail $ 2,256.3 29.83% $ 2,268.9 30.55% Canada Retail 658.6 27.04 559.2 28.57 Canada Wholesale 14.9 1.83 17.4 2.44 -------------- --------------- -------------- -------------- Total $ 2,929.8 27.10% $ 2,845.5 28.18% ============== =============== ============== ==============
The following table details the dollar impact of several items affecting the gross margin dollar increase by operating segment from fiscal 2002 to fiscal 2003:
Sales Volume Gross Margin Rate Exchange Rate Total ------------ ----------------- ------------- -------------- U.S. Retail $ 41.5 $ (54.1) $ - $ (12.6) Canada Retail 49.4 (32.3) 82.3 99.4 Canada Wholesale - (4.3) 1.8 (2.5) ------------ ------------------ --------------- ------------- Total $ 90.9 $ (90.7) $ 84.1 $ 84.3 ============ ================== =============== =============
The U.S. Retail gross margin decrease of $12.6 million resulted from a decrease of $54.1 million due to a lower gross margin rate partially offset by an increase of $41.5 million due to higher sales volume. The Canadian Retail gross margin increase of $99.4 million resulted from increases of $49.4 million due to higher sales volume and $82.3 million from fluctuations in the Canadian exchange rate, partially offset by a decrease of $32.3 million due to a lower gross margin rate. The Canadian Wholesale gross margin decrease of $2.5 million resulted from a decrease of $4.3 million due to a lower gross margin rate partially offset by $1.8 million from fluctuations in the Canadian exchange rate. Included in our U.S. Retail gross margin for fiscal 2003 and fiscal 2002 were costs related to our asset disposition initiative of $2.2 million and $1.3 million, respectively, which were incurred to mark down inventory in stores announced for closure. STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE - --------------------------------------------------- The following table presents store operating, general and administrative expense ("SG&A"), by operating segment, in dollars and as a percentage of sales for fiscal 2003 compared to fiscal 2002. SG&A expense was $3.1 billion or 28.65% for fiscal 2003 as compared to $2.8 billion or 28.12% for fiscal 2002.
Fiscal 2003 Fiscal 2002 -------------------------------------------- -------------------------------------------- SG&A Rate to Sales% SG&A Rate to Sales% ------------------ ---------------- ----------------- --------------- U.S. Retail $ 2,453.9 32.45% $ 2,329.5 31.37% Canada Retail 654.0 26.85 522.7 26.71 Canada Wholesale (9.6) (1.18) (13.0) (1.83) ------------- --------------- ------------- -------------- Total $ 3,098.3 28.65% $ 2,839.2 28.12% ============ =============== ============ ==============
Included in SG&A for fiscal 2003 was a $35.5 million charge relating to our Farmer Jack restructuring program as described in Note 4 of our Consolidated Financial Statements, a $4.2 million net gain relating to reversals of previously accrued vacancy related costs as described in Note 4 of our Consolidated Financial Statements, and a $60.1 million charge relating to our Farmer Jack goodwill and long-lived asset impairments as described in Note 3 of our Consolidated Financial Statements. In addition, included in SG&A for fiscal 2002 were net gains of $7.7 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 gain of $12.2 million relating to the early extinguishment of $50.7 million of our 7.75% Notes due April 15, 2007 and $44.5 million of our 9.125% Notes due December 15, 2011 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. Excluding these charges, SG&A as a percentage of sales for fiscal 2003 as compared to fiscal 2002 would have decreased 52 basis points. 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; o Lower costs related to our business process initiative; and o Lower severance and employee buy-out costs in the U.S. Partially offset by a $17.5 million increase in our workers' compensation and general liability reserves in response to both adverse development of prior years' costs and other developments including a continuing trend of rising costs. Also included in SG&A for fiscal 2002 were $60.5 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 in stores planned for closure or conversion for impairment upon determination that such assets will not be used for their intended useful life. During fiscal 2003 and fiscal 2002, we recorded impairment losses on property, plant and equipment of $4.4 million and $15.7 million, respectively, related to U.S. Retail stores that were or will be closed in the normal course of business. Similarly, we recorded impairment losses on property, plant and equipment of $1.7 million and $3.2 million, respectively, related to Canada Retail stores that were or will be closed in the normal course of business. These amounts were included in SG&A in our Consolidated Statements of Operations. If current operating levels and trends continue, there may be additional future impairments on long lived assets, including the potential for impairment of assets that are held and used. INTEREST EXPENSE - ---------------- Interest expense of $81.8 million for fiscal 2003 decreased from the prior year amount of $84.7 million due primarily to lower interest expense resulting from our open market purchase of $50.7 million of our 7.75% Notes due April 15, 2007 and $44.5 million of our 9.125% Notes due December 15, 2011, primarily during the fourth quarter of fiscal 2002. INCOME TAXES - ------------ The benefit from income taxes from continuing operations for fiscal 2003 was $31.7 million (a $42.3 million benefit from our U.S. operations and a $10.6 million provision for our Canadian operations) compared to $130.6 million provision for income taxes from continuing operations for fiscal 2002 (a $104.6 million provision for our U.S. operations and a $26.0 million provision for our Canadian operations). 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". Consistent with prior year, we continue to record a valuation allowance against our U.S. net deferred tax assets. (LOSS) INCOME FROM OPERATIONS OF DISCONTINUED BUSINESSES, NET OF TAX - -------------------------------------------------------------------- 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 and Wisconsin, as well as our Eight O'Clock Coffee business. These asset sales are now complete. Loss from operations of discontinued businesses, net of tax, for fiscal 2003 was $30.2 million as compared to income from operations of discontinued businesses, net of tax, of $7.6 million for fiscal 2002. During fiscal 2003, we recorded the following pretax items 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 $6.5 million; o net rent vacancy charges of $23.6 million; o severance charges of $5.8 million; and o inventory markdowns of $1.4 million. The remaining amounts for each period represent the operating results of the stores in these locations as well as results from our Eight O'Clock Coffee business. FISCAL 2002 COMPARED WITH FISCAL 2001 - ------------------------------------- OVERALL - ------- Sales for fiscal 2002 were $10.1 billion, compared with $10.2 billion for fiscal 2001; 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 for fiscal 2002 was $5.03 compared to a net loss per share of $1.88 for fiscal 2001, an increase of $3.15 per share.
Favorable / Fiscal 2002 Fiscal 2001 (Unfavorable) % Change --------------- --------------- ------------------- ---------------- Sales $ 10,096.8 $ 10,206.2 $ (109.4) (1.1)% Increase in same store sales 0.4% 2.6% NA NA Loss from continuing operations (201.1) (83.4) (117.7) (141.1) Income from discontinued operations 7.6 11.5 (3.9) (33.9) Net loss (193.5) (71.9) (121.6) (169.1) Net loss per share (5.03) (1.88) (3.15) (167.6)
Included in the results for fiscal 2002 was a pretax $6.4 million gain ($9.6 million after tax or $0.25 per share) relating to our asset disposition initiative (see Note 2 of our Consolidated Financial Statements included in our Fiscal 2002 Annual Report to Stockholders), a pretax gain of $12.2 million ($12.5 million after tax or $0.32 per share) for the cost of repurchasing $50.7 million of our 7.75% Notes due April 15, 2007 and $44.5 million of our 9.125% Notes due December 15, 2011 (see Note 6 of our Consolidated Financial Statements included in our Fiscal 2002 Annual Report to Stockholders), a $134.0 million provision for income taxes related to our U.S. net deferred tax asset valuation allowance ($3.48 per share; see Note 9 of our Consolidated Financial Statements included in our Fiscal 2002 Annual Report to Stockholders), and a nonrecurring pretax gain of $1.7 million ($1.0 million after tax or $0.03 per share) from proceeds received as a result of the sale of securities received as part of the demutualization of The Prudential Insurance Company (see Note 15 of our Consolidated Financial Statements included in our Fiscal 2002 Annual Report to Stockholders). The following table details the adjustments from "as reported" to "as adjusted" results for fiscal 2002:
Fiscal 2002 Fiscal 2001 ------------------------------------------------------------------------------------------ ------------ Adjustments to be (added) subtracted -------------------------------------------------------------- Gain on proceeds Gain on from the Fiscal early Deferred demutualization Fiscal Fiscal 2002 Asset extinguish- tax asset of a mutual 2002 2001 results as disposition ment valuation insurance results as results as (In Millions) reported initiative of debt allowance company adjusted adjusted ------------- ------------- ------------- ---------- ------------- ------------- ------------- Sales $ 10,096.8 $ - $ - $ - $ - $ 10,096.8 $10,206.2 Cost of merchandise sold (7,251.3) (1.3) - - - (7,250.0) (7,284.7) ------------- ------------- ------------- ------------- ------------- ------------- ------------ Gross margin 2,845.5 (1.3) - - - 2,846.8 2,921.5 Rate to sales 28.18% 28.19% 28.62% Store operating, general and administrative expense (2,839.2) 7.7 12.2 - 1.7 (2,860.8) (2,832.0) Rate to sales 28.12% 28.33% 27.75% ------------- ------------- ------------- ------------- ------------- ------------- ------------ Income (loss) from operations 6.3 6.4 12.2 - 1.7 (14.0) 89.5 Interest expense (84.7) - - - - (84.7) (91.7) Interest income 7.9 - - - - 7.9 7.0 ------------- ------------- ------------- ------------- ------------- ------------- ------------ (Loss) income from continuing operations before income taxes (70.5) 6.4 12.2 - 1.7 (90.8) 4.8 (Provision for) benefit from income taxes (130.6) 3.2 0.3 (134.0) (0.7) 0.6 (3.8) ------------- ------------- ------------- ------------- ------------ ------------- ----------- (Loss) income from continuing operations (201.1) 9.6 12.5 (134.0) 1.0 (90.2) 1.0 Discontinued operations: Income from operations of discontinued businesses, net of tax 7.6 - - - - 7.6 11.5 Gain on disposal of discontinued operations, net of tax - - - - - - - ------------- ------------- ------------- ------------- ------------- ------------- ------------- Income from discontinued operations 7.6 - - - - 7.6 11.5 ------------- ------------- ------------- ------------- ------------- ------------- ------------ Net loss $ (193.5) $ 9.6 $ 12.5 $ (134.0) $ 1.0 $ (82.6) $ 12.5 ============= ============= ============= ============= ============= ============= ==========
The following table details the adjustments from "as reported" to "as adjusted" results for fiscal 2001:
Fiscal 2001 ---------------------------------------------------------------------------- Adjustments to be (added) subtracted ------------------------------------------ Gain on proceeds from the Loss on demutual- early ization Fiscal 2001 Asset extinguish- of a mutual Fiscal 2001 results as disposition ment insurance results as (In Millions) reported initiative of debt company adjusted ------------- ------------- ------------- ------------- ------------- Sales $ 10,206.2 $ - $ - $ - $ 10,206.2 Cost of merchandise sold (7,288.6) (3.9) - - (7,284.7) --------------- ------------ ------------- ------------- ------------- Gross margin 2,917.6 (3.9) - - 2,921.5 Rate to sales 28.59% 28.62% Store operating, general and administrative expense (3,034.0) (189.6) (12.4) - (2,832.0) Rate to sales 29.73% 27.75% Gain on proceeds from the demutualization of a mutual insurance company 60.6 - - 60.6 - --------------- ------------ ------------ ------------ ------------- (Loss) income from operations (55.8) (193.5) (12.4) 60.6 89.5 Interest expense (91.7) - - - (91.7) Interest income 7.0 - - - 7.0 ------------- ------------- ------------- ------------- ------------- (Loss) income from continuing operations before income taxes (140.5) (193.5) (12.4) 60.6 4.8 Benefit from (provision for) income taxes 57.1 81.2 5.2 (25.5) (3.8) ------------- ----------- ------------- ------------- ------------- (Loss) income from continuing operations (83.4) (112.3) (7.2) 35.1 1.0 Discontinued operations: Income from operations of discontinued businesses, net of tax 11.5 - - - 11.5 Gain on disposal of discontinued operations, net of tax - - - - - ------------- ------------- ------------- ------------- ------------- Income from discontinued operations 11.5 - - - 11.5 ------------- ------------- ------------- ------------- ------------- Net loss $ (71.9) $ (112.3) $ (7.2) $ 35.1 $ 12.5 ============= ============= ============= ============= =============
SALES - ----- Sales for fiscal 2002 of $10.1 billion decreased $109.4 million or 1.1% from sales of $10.2 billion for fiscal 2001. The lower sales were due to a decrease in U.S. Retail sales of $296.0 million, partially offset by increases in Canada Retail sales of $150.6 million and in Canada Wholesale sales of $36.0 million. The following table presents sales for each of our operating segments for fiscal 2002 and fiscal 2001:
Fiscal 2002 Fiscal 2001 Inc (Dec) % Change ---------------- ----------------- -------------------- ---------------- U.S. Retail $ 7,427.0 $ 7,723.0 $ (296.0) (3.8)% Canada Retail 1,957.3 1,806.7 150.6 8.3 Canada Wholesale 712.5 676.5 36.0 5.3 ---------------- ----------------- -------------------- ---------------- Total $ 10,096.8 $ 10,206.2 $ (109.4) (1.1)% ================ ================= ==================== ================
The following table details the dollar impact of several items affecting the decrease in sales by operating segment from fiscal 2001 to fiscal 2002:
Impact of Impact of Foreign Comparable New Closed Exchange Sales Store Stores Stores Rate Volume Sales Total ------------- -------------- ------------- ------------- ------------- ------------- U.S. Retail $ 83.6 $ (334.3) $ - $ - $ (45.3) $ (296.0) Canada Retail 100.5 (46.7) 2.5 - 94.3 150.6 Canada Wholesale - - 0.9 35.1 - 36.0 ------------- -------------- ------------- ------------- ------------- ------------- Total $ 184.1 $ (381.0) $ 3.4 $ 35.1 $ 49.0 $ (109.4) ============= ============== ============= ============= ============= =============
The decrease in U.S. Retail sales was primarily attributable to the closure of 94 stores since the beginning of fiscal 2001, of which 33 were closed in fiscal 2002, decreasing sales by $334.3 million, and lower comparable store sales for fiscal 2002 of 1.0% as compared to fiscal 2001. Included in the 94 stores closed since the beginning of fiscal 2001 were 37 stores closed as part of the asset disposition initiative discussed in Note 2 of our Consolidated Financial Statements included in our Fiscal 2002 Annual Report to Stockholders. This decrease was partially offset by the opening of 36 new stores since the beginning of fiscal 2001, of which 18 were opened in fiscal 2002, increasing sales by $83.6 million. The increase in Canada Retail sales was primarily attributable to the opening of 16 stores since the beginning of fiscal 2001, of which 13 were opened in fiscal 2002, which increased sales by $100.5 million, the favorable effect of the Canadian exchange rate, which increased sales by $2.5 million, and an increase in comparable store sales for fiscal 2002 of 6.6% as compared to fiscal 2001. These increases were partially offset by the closure of 20 stores since the beginning of fiscal 2001, of which 9 stores were closed in fiscal 2002, decreasing sales by $46.7 million. The increase in Canada Wholesale sales of $36.0 million was attributable to higher sales volume of $35.1 million and the favorable effect of the Canadian exchange rate of $0.9 million. Average weekly sales per supermarket for U.S. Retail were approximately $320,500 for fiscal 2002 versus $312,600 for the corresponding period of the prior year, an increase of 2.5%. Average weekly sales per supermarket for Canada Retail were approximately $222,000 for fiscal 2002 versus $200,400 for the corresponding period of the prior year, an increase of 10.8%. These increases were primarily due to: o Closure of smaller stores with lower average weekly sales; o Closure of underperforming stores; and o Opening and remodeling of larger stores. GROSS MARGIN - ------------ The following table presents gross margin dollar results and gross margin as a percentage of sales by operating segment for fiscal 2002 as compared to fiscal 2001. Gross margin as a percentage of sales decreased 41 basis points to 28.18% for fiscal 2002 from 28.59% for fiscal 2001.
Fiscal 2002 Fiscal 2001 -------------------------------------------- -------------------------------------------- Gross Margin Rate to Sales% Gross Margin Rate to Sales% ------------ -------------- ------------ -------------- U.S. Retail $ 2,268.9 30.55% $ 2,364.5 30.62% Canada Retail 559.2 28.57 537.7 29.76 Canada Wholesale 17.4 2.44 15.4 2.28 -------------- --------------- ------------ -------------- Total $ 2,845.5 28.18% $ 2,917.6 28.59% ============== ================ ============ ==============
The following details the dollar impact of several items affecting the gross margin dollar decrease by operating segment from fiscal 2001 to fiscal 2002.
Sales Volume Gross Margin Rate Exchange Rate Total ------------ ----------------- ------------- ------------------ U.S. Retail $ (90.6) $ (4.9) $ - $ (95.5) Canada Retail 44.1 (23.3) 0.7 21.5 Canada Wholesale 0.8 1.1 - 1.9 ------------- -------------------- --------------- ------------- Total $ (45.7) $ (27.1) $ 0.7 $ (72.1) ============= ==================== =============== =============
The U.S. Retail gross margin decrease of $95.5 million resulted from decreases of $90.6 million due to lower sales volume and $4.9 million due to a lower gross margin rate. The Canadian Retail gross margin increase of $21.5 million resulted from increases of $44.1 million in sales volume and $0.7 million from fluctuations in the Canadian exchange rate, partially offset by a decrease of $23.3 million due to a lower gross margin rate. The Canadian Wholesale gross margin increase of $1.9 million resulted from an increase of $1.1 million due to a higher gross margin rate and an increase in sales volume of $0.8 million. This 41 basis point decrease was caused primarily by the following: o More aggressive promotional activity during the current period in order to drive sales volume and protect market share; and o Increased inventory shrink losses during the current year period compared to the prior year period. Included in gross margin for fiscal 2002 and fiscal 2001 were costs related to our asset disposition initiative of $1.3 million and $3.9 million, respectively, which were incurred to mark down inventory in stores announced for closure. Gross margin for fiscal 2001 also included costs of $6.3 million incurred as part of our business process initiative. These costs were incurred to mark down inventory to be discontinued as a result of detailed category management studies. STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE - --------------------------------------------------- The following table presents SG&A, by operating segment, in dollars and as a percentage of sales for fiscal 2002 as compared to fiscal 2001. SG&A was $2.8 billion or 28.12% for fiscal 2002 compared to $3.0 billion or 29.73% for fiscal 2001.
Fiscal 2002 Fiscal 2001 -------------------------------------------- -------------------------------------------- SG&A Rate to Sales% SG&A Rate to Sales% ------------------ ---------------- ----------------- --------------- U.S. Retail $ 2,329.5 31.37% $ 2,528.7 32.74% Canada Retail 522.7 26.71 516.4 28.58 Canada Wholesale (13.0) (1.83) (11.1) (1.65) ------------- --------------- ------------- -------------- Total $ 2,839.2 28.12% $ 3,034.0 29.73% ============= =============== ============= ==============
Included in SG&A for fiscal 2002 and fiscal 2001 were net gains of $7.7 million and net costs of $189.6 million, respectively, 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 and fiscal 2001 was a gain of $12.2 million relating to the early extinguishment of $50.7 million of our 7.75% Notes due April 15, 2007 and $44.5 million of our 9.125% Notes due December 15, 2011 and a loss of $12.4 million relating to the early extinguishment of $20.0 million of our 7.75% Notes due April 15, 2007, respectively, 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 in fiscal 2002 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. Excluding these items, SG&A as a percentage of sales for fiscal 2002 as compared to fiscal 2001 would have increased 58 basis points. The major items impacting this increase include: o Higher severance costs in the U.S.; o Increased labor costs as a percentage of sales in the U.S.; o Higher consulting costs due to a non-merchandise product and service sourcing initiative; and o Higher closed store expenses for stores closed during the normal course of business. Partially offset by: o Lower costs related to our business process initiative; o Higher gains on the sale of property and equipment during fiscal 2002; o Lower management incentive bonus expenses; and o A $7 million reduction of accruals for occupancy costs primarily related to a change in estimate. Included in SG&A for fiscal 2002 and fiscal 2001 were $60.5 million and $91.6 million, respectively, 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 in stores planned for closure or conversion for impairment upon determination that such assets will not be used for their intended useful life. During fiscal 2002, we recorded impairment losses on property, plant and equipment of $15.7 million related to U.S. Retail stores that were or will be closed in the normal course of business. Similarly, we recorded impairment losses on property, plant and equipment of $3.2 million related to Canada Retail stores that were or will be closed in the normal course of business. During fiscal 2001, there were $91.4 million in impairment losses relating to U.S. Retail stores, of which $80.9 million relates to the asset disposition initiative as discussed in Note 2 of our Consolidated Financial Statements included in our Fiscal 2002 Annual Report to Stockholders, and $5.0 million in impairment losses relating to Canada Retail stores closed in the normal course of business. These amounts were included in SG&A in our Consolidated Statements of Operations. GAIN ON PROCEEDS FROM THE DEMUTUALIZATION OF A MUTUAL INSURANCE COMPANY - ----------------------------------------------------------------------- During fiscal 2001, we received cash and common stock totaling $60.6 million from the demutualization of The Prudential Insurance Company. This amount was recorded as a nonrecurring gain and included in the determination of pretax income for fiscal 2001. INTEREST EXPENSE - ---------------- Interest expense of $84.7 million for fiscal 2002 decreased from the prior year amount of $91.7 million due primarily to the following: o Lower interest expense on our Secured Credit Agreement during fiscal 2002 compared to fiscal 2001 due to decreased rates and borrowings; and o The impact of interest rate swaps which commenced in the fourth quarter of fiscal 2001. Partially offset by: o Higher interest expense on the $275 million 9.125% Senior Notes due December 15, 2011 which were issued to refinance $178 million of the $200 million 7.70% Senior Notes due January 15, 2004. The decreased borrowing requirement on our Secured Credit Agreement was primarily caused by the following: o Cash generated from operating activities; o Proceeds received from the refinancing of $178 million of the $200 million 7.70% Senior Notes due January 15, 2004 with the issuance of $275 million 9.125% Senior Notes due December 15, 2011; and o Proceeds received as a result 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. INCOME TAXES - ------------ The provision for income taxes from continuing operations for fiscal 2002 was $130.6 million (a $104.6 million provision from our U.S. operations and a $26.0 million provision for our Canadian operations) compared to a benefit from income taxes from continuing operations of $57.1 million in fiscal 2001 (a $77.2 million benefit from our U.S. operations and a $20.1 million provision for our Canadian operations). The change in the provision for income taxes relates to the absence of the tax benefit of U.S. losses that would have been recorded had a valuation allowance of $133.7 million not been recorded and offset against our net U.S. deferred tax asset during the second quarter of fiscal 2002. During the remainder of fiscal 2002, the valuation allowance was increased by $27.8 million. Statement of Financial Accounting Standards ("SFAS") 109 "Accounting for Income Taxes" requires that a valuation allowance be created and offset against the net deferred tax asset if, based on existing facts and circumstances, it is more likely than not that some portion or all of the net deferred tax asset will not be realized (see Note 9 of our Consolidated Financial Statements included in our Fiscal 2002 Annual Report to Stockholders). INCOME FROM OPERATIONS OF DISCONTINUED BUSINESSES, NET OF TAX - ------------------------------------------------------------- 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 and Wisconsin, as well as our Eight O'Clock Coffee business. These asset sales are now complete. Income from operations of discontinued businesses, net of tax for fiscal 2002 was $7.6 million as compared to $11.5 million for fiscal 2001. These amounts for each fiscal year represent the operating results of the stores in these locations as well as results from 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. During the fourth quarter of fiscal 2003, we announced an initiative to close 5 stores and convert 13 stores to our Food Basics format in the Detroit, Michigan and Toledo, Ohio markets. As a result, we recorded a charge of $37.7 million ($2.2 million in "Cost of merchandise sold" and $35.5 million in "Store operating, general and administrative expense" in our Consolidated Statement of Operations for fiscal 2003) as follows: Fiscal 2003 -------------- Occupancy related $ 20,999 Severance and benefits 8,930 Fixed asset writeoffs 4,129 Nonaccruable closing costs 1,449 Inventory markdowns 2,244 --------------- Total charges $ 37,751 =============== As of February 28, 2004, we had 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 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) 26,553 8,930 4,129 39,612 Utilization (2) (32,053) (7,883) (4,129) (44,065) Adjustments (3) (5,776) 1,558 - (4,218) ------------ ------------- -------------- ------------ Balance at February 28, 2004 $ 91,845 $ 9,345 $ - $ 101,190 ============ ============= ============== ============
(1) The additions to occupancy during fiscal 2003 represent charges related to closures and conversions in the Detroit, Michigan market of $21.0 million and the present value of accrued interest related to lease obligations of $5.6 million. The addition to severance during fiscal 2002 related to retention and productivity incentives that were accrued as earned, and the addition in fiscal 2003 related to a voluntary termination plan initiated in the Detroit, Michigan market. (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 $4.2 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 $3.2 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 described above, during fiscal 2003, we recorded a net charge of $33.5 million to our Consolidated Statements of Operations reflecting a $37.7 million charge relating to our Farmer Jack restructuring program offset by a $4.2 million net gain relating to reversals of previously accrued vacancy related costs. During fiscal 2002, we recorded a net gain of $6.4 million to our Consolidated Statement of Operations reflecting a $13.7 million gain primarily relating to reversals of previously accrued vacancy related costs offset by a $7.3 million charge for non-accruable store inventory markdowns and closing costs. As of February 28, 2004, we had paid approximately $59.3 million of the total original severance and benefits charge recorded, which resulted from the termination of approximately 4,800 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 2005. At February 28, 2004, approximately $26.8 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 fiscal 2003, 2002 and 2001 are the sales and operating results of the aforementioned permanently closed stores while they were open during the periods presented. The results of these operations are as follows: Fiscal 2003 Fiscal 2002 Fiscal 2001 -------------- ---------------- --------------- Sales $ 41,810 $ 68,776 $306,220 ========== =========== ========= Operating loss $ (8,034) $ (5,371) $(25,556) ========== =========== ========= We have evaluated the liability balance of $101 million as of February 28, 2004 based upon current available information 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 - ------------------------------- CASH FLOWS - ---------- The following table presents excerpts from our Consolidated Statements of Cash Flows:
Fiscal 2003 Fiscal 2002 Fiscal 2001 --------------- --------------- ------------- Net cash (used in) provided by operating activities $ (14,978) $ 191,046 $ 325,898 --------------- --------------- ------------ Net cash provided by (used in) investing activities $ 129,923 $ (162,799) $ (140,374) --------------- --------------- ----------- Net cash used in financing activities $ (46,012) $ (608) $ (147,617) --------------- --------------- ------------
Net cash flow used in operating activities of $15.0 million for fiscal 2003 primarily reflected our net loss of $147.0 million adjusted for non-cash charges of $60.1 million related to our Farmer Jack long lived asset / goodwill impairment, $33.5 million related to our Farmer Jack restructuring program, and depreciation and amortization of $268.8 million, partially offset by the gain from the sale of the discontinued operations of $162.9 million, a decrease in accounts payable of $58.1 million and a decrease in other non-current liabilities of $35.4 million. Net cash flow provided by operating activities of $191.0 million for fiscal 2002 primarily reflected our net loss of $193.5 million adjusted for non-cash charges of $263.6 million for depreciation and amortization and $157.6 million related to our income tax provision. Net cash flow provided by operating activities of $325.9 million for fiscal 2001 primarily reflected our net loss of $71.9 million adjusted for non-cash charges of $201.1 million related to restructuring and $262.6 million related to depreciation and amortization, partially offset by $47.3 million related to our income tax benefit. Net cash flow provided by investing activities of $129.9 million for fiscal 2003 primarily reflected cash received from the sale of our assets of $264.6 million (most of which related to our discontinued operations), partially offset by property expenditures totaling $134.7 million, which included 19 new supermarkets and 2 major remodels. Net cash flow used in investing activities of $162.8 million for fiscal 2002 primarily reflected $219.5 million used for property expenditures, which included 31 new supermarkets, 38 major remodels or enlargements and capital expenditures related to the business process initiative, partially offset by $56.7 million in proceeds from property disposals. Net cash flow used in investing activities of $140.4 million for fiscal 2001 primarily reflected $246.2 million used for property expenditures, which included 21 new supermarkets, 26 major remodels or enlargements, and capital expenditures related to the business process initiative, partially offset by $105.8 million in proceeds from property disposals. For fiscal 2004, we have planned capital expenditures of approximately $275.0 to $300.0 million, which will be funded primarily from existing working capital. These expenditures relate primarily to opening approximately 10 to 15 new supermarkets, converting 30 to 35 stores to new formats, and enlarging or remodeling 100 - 125 supermarkets. We currently expect to close approximately 5 - 10 stores during fiscal 2004. Net cash used in financing activities of $46.0 million for fiscal 2003 primarily reflected $135.0 million in payments on our revolving lines of credit, $47.1 million in payments on long term borrowings, and $13.6 million in principal payments on capital leases, partially offset by $166.5 million in long-term borrowings. Net cash flow used in financing activities of $0.6 million for fiscal 2002 primarily reflected $178.3 million in payments on our revolving lines of credit, $95.0 million in payments on long-term borrowings, $25.6 million in decreased book overdrafts, $5.7 million paid in deferred financing fees, and $12.2 million in principal payments on capital leases, partially offset by $313.3 million in borrowings under revolving lines of credit. Net cash flow used in financing activities of $147.6 million for fiscal 2001 primarily reflected $1.3 billion in payments on revolving lines of credit, $223.9 million in payments on long-term borrowings, and $11.7 million in principal payments on capital leases, partially offset by $1.1 billion in proceeds under revolving lines of credit and $277.0 million in long-term borrowings. WORKING CAPITAL - --------------- We had working capital of $72.4 million at February 28, 2004 compared to working capital of $9.0 million at February 22, 2003. We had cash and cash equivalents aggregating $276.2 million at February 28, 2004 compared to $199.0 million at the end of fiscal 2002. The increase in working capital was attributable primarily to the following: o An increase in cash and cash equivalents as detailed in the Consolidated Statements of Cash Flows; o A decrease in current portion of long term debt due to the repayment of our 7.70% Notes due January 15, 2004; and o A decrease in accounts payable (inclusive of book overdrafts). Partially offset by the following: o A decrease in inventories, prepaid expenses and other current assets mainly due to the sale of assets held for sale; and o An increase in other accruals. REVOLVING CREDIT AGREEMENT - -------------------------- During fiscal 2003, we amended and restated our Secured Credit Agreement (the "Amended and Restated Credit Agreement") and decreased our borrowing base to $400 million. Thus, at February 28, 2004, we had a $400 million secured revolving 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 amended facility provides us with greater operating flexibility and provides for increased capital spending. Under the Amended and Restated Credit Agreement, there are no financial covenants as long as availability under the agreement exceeds $50 million. The Amended and Restated Credit Agreement is comprised of a U.S. credit agreement amounting to $330 million and a Canadian credit agreement amounting to $70 million (C$93.5 million at February 28, 2004) and is collateralized by inventory, certain accounts receivable and certain pharmacy scripts. Borrowings under the Amended and Restated Credit Agreement bear interest based on LIBOR and Prime interest rate pricing. This agreement expires in December 2007. As of February 28, 2004, there were no borrowings under these credit agreements. As of February 28, 2004, after reducing availability for outstanding letters of credit and borrowing base requirements, we had $213.0 million available under the Amended and Restated Credit Agreement. OTHER - ----- During fiscal 2003, we repurchased in the open market $9.8 million of our 7.75% Notes due April 15, 2007 and $14.0 million of our 9.125% Notes due December 15, 2011. These open market repurchases resulted in a net gain due to the early extinguishment of debt of $1.9 million, which has been classified within income from operations in accordance with SFAS 145, "Rescission of FASB Statements 4, 44 and 64, Amendment of FASB 13, and Technical Corrections". During fiscal 2002, we repurchased in the open market $50.7 million of our 7.75% Notes due April 15, 2007 and $44.5 million of our 9.125% Notes due December 15, 2011. These open market repurchases resulted in a net gain due to the early extinguishment of debt of $12.2 million. In accordance with SFAS 145, this gain has been reclassified within income from operations for fiscal 2002. Under the Amended and Restated Credit Agreement, we are permitted to make bond repurchases and may do so from time to time in the future. On February 27, 2004, we sold 13 properties and simultaneously leased them back from the purchaser. However, due to our Company's continuing involvement with these properties, the sale did not qualify for sale-leaseback accounting in accordance with SFAS 98, "Accounting for Leases" but rather qualified as a financing under the provisions of SFAS 66, "Accounting for Sales of Real Estate." In accordance with SFAS 66, the carrying value of these properties of approximately $73.6 million remained on our Consolidated Balance Sheet and no sale was recognized. Instead, the sales price of these properties of $166.5 million was recorded as a financing obligation with a maturity of 20 years, with the exception of one property that has a maturity of 22 years, within "Long term debt" on our Consolidated Balance Sheet at February 28, 2004. In addition, all lease payments are being expensed to "Interest expense" in our Consolidated Statements of Operations. Of the 13 properties sold, all were sold for a profit resulting in a gain, after deducting expenses, which has been deferred and will not be recognized until the end of the respective leases when our continuing involvement ceases. We expect to enter into similar transactions for other owned properties from time to time in the future. 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 February 28, 2004 at terms contingent upon market conditions at the time of sale. We do not expect to pay dividends during fiscal 2004. As of February 28, 2004, we have the following contractual obligations and commitments:
Payments Due by Period (in millions) --------------------------------------------------------------------------------------------- Contractual Less than Obligations Total 1 Year 1 - 3 Years 4 - 5 Years Thereafter ---------------------- ------------- -------------- ------------------ ------------------ ---------- Debt (1) $ 826.0 $ 2.3 $ 4.5 $ 220.0 $ 599.2 Capital Leases (2) 176.5 24.4 28.3 22.1 101.7 Operating Leases (2) 3,281.9 246.1 479.1 444.2 2,112.5 Pension Obligations (3) 52.8 4.5 4.9 4.7 38.7 Postretirement Obligations (4) 23.0 2.1 4.3 4.4 12.2 Occupancy Payments (5) 143.6 30.0 40.3 28.6 44.7 Severance (6) 15.5 12.0 1.7 0.3 1.5 Purchase Commitments(7): Equipment Purchases 6.6 6.4 0.2 - - Equipment Rentals 58.1 43.9 8.4 4.5 1.3 Suppliers 1,494.2 404.6 772.0 317.6 - Manufacturers/Vendors 54.8 33.9 20.4 0.5 - Service Contracts 26.6 19.6 6.9 0.1 - Consulting 30.1 23.6 6.5 - - ------------- ------------- -------------- ------------- ----------- Total $ 6,189.7 $ 853.4 $ 1,377.5 $ 1,047.0 $ 2,911.8 ============= ============= ============== ============= ===========
(1) Amounts represent contractual amounts due. Refer to Note 8 of our Consolidated Financial Statements for information regarding long-term debt. We expect to settle such long-term debt by several methods, including cash flows from operations. (2) Amounts represent contractual amounts due. Refer to Note 10 of our Consolidated Financial Statements for information regarding capital and operating leases. (3) Amounts represent future benefit payments for our unfunded defined benefit pension plans as well as future contributions to our funded defined benefit pension plans. Refer to Note 12 of our Consolidated Financial Statements for information regarding our defined benefit pension plans. (4) Amounts represent future benefit payments for our unfunded postretirement benefit obligation. Refer to Note 12 of our Consolidated Financial Statements for information regarding our postretirement benefits. (5) Amounts represent our future occupancy payments primarily relating to our asset disposition initiatives. Refer to Note 4 of our Consolidated Financial Statements for information regarding our occupancy obligations. (6) Amounts represent our future severance obligations primarily relating to our asset disposition initiatives. Refer to Note 4 of our Consolidated Financial Statements for information regarding our severance obligations. (7) The purchase commitments include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including open purchase orders. We expect to fund these commitments with cash flows from operations.
Expiration of Commitments (in millions) ---------------------------------------------------------------------------------------------- Other Less than Commitments Total 1 Year 1 - 3 Years 4 - 5 Years Thereafter ---------------------- ------------- -------------- ------------------ --------------- --------------- Guarantees $ 2.2 $ 0.2 $ 0.4 $ 0.5 $ 1.1 ========== ========= ========= ========= ==========
We are the guarantor of a loan of $2.2 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 February 28, 2004. Our liquidity rating was SGL2 with Moody's as of February 28, 2004. Our recovery rating was 1 with S&P as of February 28, 2004 indicating a high expectation of 100% recovery of our senior debt to our lenders. Future rating changes could affect the availability and cost of financing to our Company. We believe that our present level of invested cash and cash generated from operations 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 believe our contingency plans would mitigate the potential risk; however, there can be no assurance that such actions will be pursued or successful. 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 $635.3 million in notes as of February 28, 2004 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 fiscal 2003, a presumed 1% change in the variable floating rate would have impacted interest expense by $0.2 million. 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 fiscal 2003, a change in the Canadian currency of 10% would have resulted in a fluctuation in net income of $1.7 million. 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. 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 total current and non-current liability for self-insurance reserves recorded at February 28, 2004 related to our U.S. Retail segment was $98.5 million, which includes a $17.5 million increase in our workers' compensation and general liability reserves in response to both adverse development of prior years' costs and other developments including a continuing trend of rising costs. As of February 28, 2004, the self-insurance reserves relating to our Canada Retail and Canada Wholesale segments were not significant. The discount rate used at February 28, 2004 was 2.7% and was based on the timing of the projected cash flows of future payments to be made for claims. A 1% increase in the discount rate would decrease the required liability by $2.1 million. Conversely, a 1% decrease in the discount rate would increase the required liability by $2.2 million. The required liability is also subject to adjustment in the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity). Long-Lived Assets 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 is 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 approach and a risk free rate. During fiscal 2003, we recorded total impairment losses on U.S. Retail segment property, plant and equipment of $37.2 million relating to our Farmer Jack stores. Refer to Note 3 - Valuation of Long Lived Assets and Goodwill and Note 4 - Asset Disposition Initiative in the Notes to Consolidated Financial Statements for further discussion relating to impairment charges recorded during the current fiscal year. We also review assets in stores planned for closure or conversion for impairment upon determination that such assets will not be used for their intended useful life. During fiscal 2003, we recorded impairment losses on property, plant and equipment of $25.0 million ($23.3 million in our U.S. Retail segment and $1.7 million in our Canada Retail segment). Of this amount, $4.4 million related to U.S. Retail stores and $1.7 million related to Canada 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 $18.9 million during fiscal 2003 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). If current operating levels and trends continue, 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 amount. If such comparison indicates that an impairment exists, we recognize a charge to operations at that time based upon the differences between the implied fair market value of the goodwill and the balance sheet amount. During fiscal 2003, we determined that goodwill relating to the Farmer Jack reporting unit was entirely impaired; thus, we recorded an impairment charge of $27.0 million as a component of operating income in "Store operating, general and administrative expense" in our Consolidated Statements of Operations. Refer to Note 3 - Valuation of Long Lived Assets and Goodwill in the Notes to Consolidated Financial Statements for further discussion relating to the impairment charges recorded. As of February 28, 2004, our remaining goodwill balance is $5.9 million. 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 February 28, 2004, we had liabilities for future minimum lease payments of $131 million, which related to 77 vacant stores and 36 subleased or assigned stores. Of this amount, $21 million relates to stores closed in the normal course of business, $91 million relates to stores closed as part of the asset disposition initiative (see Note 4 of our Consolidated Financial Statements) and $19 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 postretirement 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 12 of our consolidated financial statements 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. An example of how changes in these assumptions can affect our financial statements occurred in fiscal 2003. Based on our review of market interest rates, actual return on plan assets and other factors, we lowered our discount rate for U.S. plans to 6.00% at year-end 2003 from 6.50% at year-end 2002. We also lowered our expected return on plan assets for U.S. plans to 7.00% at year-end 2003 from 7.50% at year-end 2002. These rates are applied to the calculated value of plan assets and liabilities, which results in an amount that is included in pension expense or income in the following years. When not considering other changes in assumptions or actual return on plan assets, a 1% change in the discount rate alone would either increase the benefit obligation by $12.2 million or decrease the benefit obligation by $10.0 million, and a 1% change in expected return on plan assets alone would either increase or decrease 2003 U.S. pension expense by $1.2 million. When not considering other changes in assumptions for our post-retirement benefits, a 1% change in the discount rate alone would either increase or decrease 2003 service and interest cost by $0.05 million, while the accumulated post-retirement benefit obligation would either increase by $2.1 million or decrease by $1.9 million. The effect of a 1% change in the assumed health care cost trend rate for each future year on the sum of 2003 service and interest cost would either be an increase or decrease of $0.1 million, while accumulated post-retirement benefit obligation would either increase by $1.6 million or decrease by $1.4 million. Refer to Note 12 - Employee Benefit Plans in the Notes to Consolidated Financial Statements for a full discussion of our Company's employee benefit plans. 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. 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"). 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. Beginning in fiscal 2003, any gain or loss on extinguishment of debt, previously classified as an extraordinary item in prior periods presented, that does not meet the criteria of APB No. 30 for such classification, will be reclassified to conform to the provisions of SFAS 145. In accordance with SFAS 145, we have reclassified both the fiscal 2002 $12.2 million pretax extraordinary gain and the fiscal 2001 $12.4 million pretax extraordinary loss to (loss) income from operations. In addition, we decreased income tax expense by $0.3 million and $5.3 million, respectively, to reclassify the tax benefits of these transactions in accordance with the new accounting standard. In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will supersede Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146 requires that costs associated with an exit or disposal plan be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. This Statement impacted the timing of recognition of costs associated with our store closures subsequent to December 31, 2002. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure" ("SFAS 148"), which amends SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In response to a growing number of companies announcing plans to record expenses for the fair value of stock options, SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The amendments to SFAS 123 in paragraphs 2(a)-2(e) of this Statement shall be effective for financial statements for fiscal years ending after December 15, 2002. The disclosure requirements set forth in this statement have been adopted in fiscal 2002 and did not have a significant impact on the financial statements. 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 January 2003 and December 2003, the FASB issued FIN 46 and FIN 46-R, respectively. FIN 46 and FIN 46-R address 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 and FIN 46-R require 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 and FIN 46-R apply 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 and FIN 46-R apply to VIE's no later than the end of the first reporting period ending after March 15, 2004 (the quarter ending June 19, 2004 for our Company). The Interpretations require 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 7, our Company served 63 franchised stores as of February 28, 2004. 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 Note 15 "Operating Segments" and our equipment leases and inventory notes, which totaled $38.6 million at February 28, 2004. We are currently in the process of analyzing the franchisee relationships in accordance with FIN 46 and FIN 46-R to determine if any or all are VIE's. We believe it is likely that these franchisees are VIE's, and that we are the primary beneficiary. Therefore, we would be required to consolidate these entities upon FIN 46 and FIN 46-R becoming effective for our Company. 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 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). The adoption of SFAS 150 did not have a material impact on our financial statements. In November 2003, the Emerging Issues Task Force confirmed as a consensus EITF Issue No. 03-10, "Application of EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, by Resellers to Sales Incentives Offered to Consumers by Manufacturers" ("EITF 03-10"). EITF 03-10 will not impact our Company's existing accounting and reporting policies for manufacturers' coupons that can be presented at any retailer that accepts coupons. For arrangements with vendors that are entered into or modified after February 28, 2004, our Company is required to record the vendor reimbursement as a reduction of cost of sales (instead of sales) if the coupon can only be redeemed at a Company retail store. This modification to our Company's accounting and reporting policies will only impact sales and cost of sales beginning in our Company's first quarter of fiscal 2004 (the quarter ending June 19, 2004) and is not expected to have a material impact on sales or cost of sales. In December 2003, the FASB issued SFAS 132 R, "Employer's Disclosure about Pensions and Other Postretirement Benefits" ("SFAS 132 R"). SFAS 132 R requires new annual disclosures about the type of plan assets, investments strategy, measurement date, plan obligations, and cash flows as well as the components of the net periodic benefit cost recognized in interim periods. The new annual disclosure requirements apply to fiscal years ending after December 15, 2003, except for the disclosure of expected future benefit payments, which must be disclosed for fiscal years ending after June 15, 2004. Interim period disclosures are generally effective for interim periods beginning after December 15, 2003. We have included the disclosures required by SFAS 132 R, including expected future benefit payments, in our consolidated financial statements for the year ended February 28, 2004. During January 2004, the FASB issued FASB Staff Position ("FSP") 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act")", which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act. The guidance in FSP 106-1 is effective for interim or annual financial statements of fiscal years ending after December 7, 2003. The election to defer accounting for the Act is a one-time election that must be made before net periodic postretirement benefit costs for the period that includes the Act's enactment date are first included in reported financial information pursuant to the requirements of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" ("SFAS 106"). Based upon the uncertainties related to the appropriate accounting methodology for this event and in accordance with FSP 106-1, we elected to defer accounting for the effects of the Act and accordingly, the measures of the accumulated postretirement benefit obligations and the net postretirement benefit cost disclosed do not reflect the effects of the Act on the postretirement benefits. We have not determined the impact of the Act on these benefits. 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. The Great Atlantic & Pacific Tea Company, Inc. Consolidated Statements of Operations (Dollars in thousands, except per share amounts)
Fiscal 2003 Fiscal 2002 Fiscal 2001 ---------------------- --------------------- ---------------------- Sales $ 10,812,462 $ 10,096,781 $ 10,206,246 Cost of merchandise sold (7,882,646) (7,251,322) (7,288,619) --------------- -------------- ---------------- Gross margin 2,929,816 2,845,459 2,917,627 Store operating, general and administrative expense (3,098,305) (2,839,201) (3,034,014) Gain on proceeds from the demutualization of a mutual insurance company - - 60,606 -------------- -------------- --------------- (Loss) income from operations (168,489) 6,258 (55,781) Interest expense (81,814) (84,679) (91,722) Interest income 7,285 7,897 6,972 -------------- -------------- --------------- Loss from continuing operations before income taxes (243,018) (70,524) (140,531) Benefit from (provision for) income taxes 31,671 (130,630) 57,138 -------------- --------------- --------------- Loss from continuing operations (211,347) (201,154) (83,393) Discontinued operations: (Loss) income from operations of discontinued businesses, net of tax benefit of $21.9 for the year ended February 28, 2004, and tax provision of $5.5 and $8.3 for the years ended February 22, 2003 and February 23, 2002, respectively (30,183) 7,645 11,487 Gain on disposal of discontinued operations, net of tax provision of $68.4 as of February 28, 2004 94,506 - - -------------- -------------- --------------- Income from discontinued operations 64,323 7,645 11,487 -------------- -------------- --------------- Net loss $ (147,024) $ (193,509) $ (71,906) ============== ============== =============== Net loss per share - basic and diluted: Continuing operations $ (5.49) $ (5.23) $ (2.17) Discontinued operations 1.67 0.20 0.29 -------------- -------------- -------------- Net loss per share - basic and diluted $ (3.82) $ (5.03) $ (1.88) ============== ============= ============== Weighted average common shares outstanding: Basic 38,516,750 38,494,812 38,350,616 ============== ============== =============== Diluted 38,516,750 38,494,812 38,350,616 ============== ============== =============== See Notes to Consolidated Financial Statements.
The Great Atlantic & Pacific Tea Company, Inc. Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income (Dollars in thousands, except share amounts)
Accumulated Common stock Additional other Retained Total ----------------------------- paid-in comprehensive earnings Stockholders' Shares Amount capital loss (deficit) equity ------------- -------------- ---------- ------------------ ----------- --------------- Balance at 2/24/01 38,347,216 $ 38,347 $456,470 $ (72,808) $ 326,802 $ 748,811 Net loss (71,906) (71,906) Stock options exercised 20,412 21 283 304 Other comprehensive loss (4,221) (4,221) -------------- ----------- ----------- ---------------- ---------- ------------ Balance at 2/23/02 38,367,628 38,368 456,753 (77,029) 254,896 672,988 Net loss (193,509) (193,509) Stock options exercised 148,178 148 2,658 2,806 Other comprehensive income 15,906 15,906 ------------- ----------- ----------- ---------------- ----------- ------------ Balance at 2/22/03 38,515,806 38,516 459,411 (61,123) 61,387 498,191 Net loss (147,024) (147,024) Stock options exercised 3,099 3 168 171 Other comprehensive income 34,486 34,486 ------------- ----------- ----------- -------------- ------------- ----------- Balance at 2/28/04 38,518,905 $ 38,519 $459,579 $ (26,637) $ (85,637) $ 385,824 ============= =========== =========== ============== ============= =========== Fiscal 2003 Fiscal 2002 Fiscal 2001 -------------------- -------------------- -------------------- Comprehensive (loss) income Net loss $ (147,024) $ (193,509) $ (71,906) ----------- ----------- ------------- Foreign currency translation adjustment 39,206 15,363 (5,089) Net unrealized gain on available for sale securities, net of tax - - 933 Reclassification adjustment for gains included in net loss, net of tax - (933) - Minimum pension liability adjustment, net of tax (1,547) (1,539) (65) Net unrealized (loss) gain on derivatives, net of tax (3,173) 3,015 - ------------ ----------- ------------ Other comprehensive income (loss) 34,486 15,906 (4,221) ----------- ----------- ------------- Total comprehensive loss $ (112,538) $ (177,603) $ (76,127) =========== =========== ============= See Notes to Consolidated Financial Statements.
The Great Atlantic & Pacific Tea Company, Inc. Consolidated Balance Sheets (Dollars in thousands, except share amounts)
February 28, 2004 February 22, 2003 ----------------- ----------------- Assets Current assets: Cash and cash equivalents $ 276,151 $ 199,014 Accounts receivable, net of allowance for doubtful accounts of $13,620 and $9,799 at February 28, 2004 and February 22, 2003, respectively 190,737 185,411 Inventories 654,344 682,734 Prepaid expenses and other current assets 25,080 32,429 ------------ ------------ Total current assets 1,146,312 1,099,588 ------------ ------------ Property: Land 77,915 74,643 Buildings 317,596 297,217 Equipment and leasehold improvements 1,975,218 2,324,021 ------------ ------------ Total - at cost 2,370,729 2,695,881 Less accumulated depreciation and amortization (987,027) (1,157,764) ------------ ------------ Property owned 1,383,702 1,538,117 Property under capital leases, net 65,632 71,806 ------------ ------------ Property - net 1,449,334 1,609,923 Other assets 154,904 175,726 ------------ ------------ Total assets $ 2,750,550 $ 2,885,237 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 2,271 $ 25,820 Current portion of obligations under capital leases 15,901 13,787 Accounts payable 477,536 511,634 Book overdrafts 96,273 101,817 Accrued salaries, wages and benefits 176,812 180,812 Accrued taxes 69,217 53,774 Other accruals 235,910 202,968 ------------ ------------ Total current liabilities 1,073,920 1,090,612 ------------ ------------ Long-term debt 823,738 803,277 Long-term obligations under capital leases 73,980 83,485 Other non-current liabilities 393,088 409,672 ------------ ------------ Total liabilities 2,364,726 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 - 38,518,905 and 38,515,806 shares at February 28, 2004 and February 22, 2003, respectively 38,519 38,516 Additional paid-in capital 459,579 459,411 Accumulated other comprehensive loss (26,637) (61,123) (Accumulated deficit) retained earnings (85,637) 61,387 ------------- ------------ Total stockholders' equity 385,824 498,191 ------------ ------------ Total liabilities and stockholders' equity $ 2,750,550 $ 2,885,237 ============ ============
See Notes to Consolidated Financial Statements. The Great Atlantic & Pacific Tea Company, Inc. Consolidated Statements of Cash Flows (Dollars in thousands)
Fiscal 2003 Fiscal 2002 Fiscal 2001 --------------- --------------- ---------------- Cash Flows From Operating Activities: Net loss $ (147,024) $ (193,509) $ (71,906) Adjustments to reconcile net loss to net cash provided by operating activities: Farmer Jack long lived asset / goodwill impairment charge 60,082 - - Asset disposition initiative 33,546 (6,394) 201,067 Depreciation and amortization 268,765 263,585 262,552 Realized gain on sale of securities - (1,717) - Environmental charge - - 1,964 Deferred income tax provision (benefit) 8,670 157,566 (47,298) Loss (gain) on disposal of owned property and write-down of property, net 348 (1,140) 348 Gain on sale of discontinued operations (162,942) - - Decrease (increase) in receivables 400 47,583 (22,151) Decrease in inventories 44,025 46,705 58,288 (Increase) decrease in prepaid expenses and other current assets (40,331) 44,631 (39,511) (Increase) decrease in other assets (2,604) 19,274 988 Decrease in accounts payable (58,099) (54,575) (12,446) Increase (decrease) in accrued salaries, wages and benefits, and taxes 5,307 (28,511) 18,027 Increase (decrease) in other accruals 16,605 (63,051) (17,051) Decrease in other non-current liabilities (35,371) (52,650) (7,684) Other, net (6,355) 13,249 711 ------------- ------------- ------------ Net cash (used in) provided by operating activities (14,978) 191,046 325,898 ------------- ------------- ------------ Cash Flows From Investing Activities: Expenditures for property (134,677) (219,530) (246,182) Proceeds from disposal of property 264,600 56,731 105,808 ------------ ------------ ------------ Net cash provided by (used in) investing activities 129,923 (162,799) (140,374) ------------ ------------ ------------ Cash Flows From Financing Activities: Changes in short-term debt - - (5,000) Proceeds under revolving lines of credit - 313,253 1,098,675 Payments on revolving lines of credit (135,000) (178,253) (1,288,282) Proceeds from long-term borrowings 166,548 153 276,964 Payments on long-term borrowings (47,137) (95,039) (223,907) Principal payments on capital leases (13,563) (12,167) (11,710) (Decrease) increase in book overdrafts (6,562) (25,617) 18,824 Deferred financing fees (10,319) (5,744) (13,485) Proceeds from stock options exercised 21 2,806 304 ------------ ------------ ------------ Net cash used in financing activities (46,012) (608) (147,617) ------------- ------------- ------------- Effect of exchange rate changes on cash and cash equivalents 8,204 2,755 (837) ------------ ------------ ------------- Net increase in cash and cash equivalents 77,137 30,394 37,070 Cash and cash equivalents at beginning of year 199,014 168,620 131,550 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 276,151 $ 199,014 $ 168,620 ============ ============ ============
See Notes to Consolidated Financial Statements. The Great Atlantic & Pacific Tea Company, Inc. Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, and where noted) Note 1 - Summary of Significant Accounting Policies Basis of Presentation and Consolidation - --------------------------------------- The consolidated financial statements include the accounts of our Company and all majority-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. We operate retail supermarkets in the United States and Canada. The U.S. operations are mainly in the Eastern part of the U.S. and certain parts of the Midwest. See the following footnotes for additional information on our Canadian Operations: Note 7 - Wholesale Franchise Business, Note 8 - Indebtedness, Note 11 - Income Taxes, Note 12 - Retirement Plans and Benefits, Note 14 - Commitments and Contingencies, and Note 15 - Operating Segments. Our principal stockholder, Tengelmann Warenhandelsgesellschaft KG ("Tengelmann"), owned 57.0% of our common stock as of February 28, 2004. Fiscal Year - ----------- Our fiscal year ends on the last Saturday in February. Fiscal 2003 ended February 28, 2004, fiscal 2002 ended February 22, 2003, and fiscal 2001 ended February 23, 2002. Fiscal 2003 had 53 weeks and both fiscal 2002 and fiscal 2001 were each comprised of 52 weeks. Revenue Recognition - ------------------- Retail revenue is recognized at point-of-sale. Wholesale revenue is recognized, in accordance with its terms, when goods are shipped and title to products and risk of loss are transferred to customers. Discounts that we provide to customers are accounted for as a reduction to sales upon sale. Vendor Allowances - ----------------- Vendor allowances that relate to our Company's buying and merchandising activities consist primarily of advertising and promotional allowances. With the exception of allowances described below, allowances are recognized as a reduction of cost of goods sold when the related performance is completed and the inventory is sold. Lump-sum payments received for multi-year contracts are generally amortized on a straight line basis over the life of the contracts. Vendor rebates or refunds that are contingent upon our Company completing a specified level of purchases or remaining a reseller for a specified time period are recognized as a reduction of cost of goods sold based on a systematic and rational allocation of the rebate or refund to each of the underlying transactions that results in progress toward earning that rebate or refund, assuming that we can reasonably estimate the rebate or refund and it is probable that the specified target will be obtained. If we believe attaining the milestone is not probable, the rebate or refund is recognized as the milestone is achieved. In November 2003, the Emerging Issues Task Force confirmed as a consensus EITF Issue No. 03-10, "Application of EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, by Resellers to Sales Incentives Offered to Consumers by Manufacturers" ("EITF 03-10"). EITF 03-10 will not impact our Company's existing accounting and reporting policies for manufacturers' coupons that can be presented at any retailer that accepts coupons. For arrangements with vendors that are entered into or modified after February 28, 2004, our Company is required to record the vendor reimbursement as a reduction of cost of sales (instead of sales) if the coupon can only be redeemed at a Company retail store. This modification to our Company's accounting and reporting policies will only impact sales and cost of sales beginning in our Company's first quarter of fiscal 2004 (the quarter ending June 19, 2004) and is not expected to have a material impact on sales or cost of sales. Use of Estimates - ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Cash and Cash Equivalents - ------------------------- Short-term investments that are highly liquid with an original maturity of three months or less are deemed to be cash equivalents and are included in "Cash and cash equivalents" on our Consolidated Balance Sheets. Inventories - ----------- Store inventories are stated 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 stated primarily at the lower of cost or market with cost determined on a first-in, first-out basis. Inventories of certain acquired companies are stated using the last-in, first-out method, which was their practice prior to acquisition. See Note 6 - Inventory for additional information regarding our use of the last-in, first-out method. We evaluate inventory shrinkage throughout the year based on the results of our periodic physical counts in our stores and distribution centers and record reserves based on the results of these counts to provide for estimated shrinkage as of the balance sheet date. Properties Held for Sale - ------------------------ Properties held for sale include those properties, which have been identified for sale by our Company and are recorded at the lower of their carrying value or fair value less cost to sell. Once properties are identified as held for sale, they are no longer depreciated and are reclassified to "Prepaid expenses and other current assets" on our Consolidated Balance Sheets. Advertising Costs - ----------------- Advertising costs incurred to produce media advertising are expensed in the period the advertisement is first shown. Other advertising costs, primarily costs to produce circulars, place advertisements and pay advertising agency fees, are expensed when incurred. We recorded advertising expense of $136.5 million for both fiscal 2003 and 2002, and $136.0 million for fiscal 2001. Pre-opening Costs - ----------------- Non-capital expenditures incurred in opening new stores or remodeling existing stores are expensed as incurred. Software Costs - -------------- We capitalize externally purchased software and amortize it over three to five years. Amortization expense related to software costs for fiscal 2003, 2002 and 2001 was $6.4 million, $7.5 million and $3.3 million, respectively. We apply the provisions of the American Institute of Certified Public Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires the capitalization of certain internally generated software costs. In fiscal 2003, 2002 and 2001, we capitalized $4.0 million, $26.7 million and $24.1 million, respectively, of such software costs. For fiscal 2003, 2002 and 2001, we recorded related amortization expense of $13.4 million, $7.6 million and $2.7 million, respectively. Earnings Per Share - ------------------ We calculate earnings per share in accordance with Statement of Financial Accounting Standards ("SFAS") 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires dual presentation of basic and diluted earnings per share ("EPS") on the face of the Consolidated Statements of Operations and requires a reconciliation of the numerators and denominators of the basic and diluted EPS calculations. Basic EPS is computed by dividing net income (loss) by the weighted average shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if options to issue common stock were exercised and converted to common stock. The weighted average shares outstanding utilized in the basic EPS calculation were 38,516,750 for fiscal 2003, 38,494,812 for fiscal 2002 and 38,350,616 for fiscal 2001. The additional common stock equivalents for fiscal 2003, 2002 and 2001 would have been 391,915, 387,040 and 588,603, respectively; however, such shares were antidilutive and thus excluded from the diluted EPS calculation. 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 amount. If such comparison indicates that an impairment exists, 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 amount. During fiscal 2003, we determined that goodwill relating to the Farmer Jack reporting unit was entirely impaired; thus, we recorded an impairment charge of $27.0 million as a component of operating income in "Store operating, general and administrative expense" in our Consolidated Statements of Operations. Refer to Note 3 - Valuation of Long Lived Assets and Goodwill in the Notes to Consolidated Financial Statements for further discussion relating to the impairment charges recorded. The book value of excess of cost over net assets acquired at February 28, 2004 and February 22, 2003 was $5.9 million and $32.0 million, respectively, net of accumulated amortization of $14.0 million for both fiscal years. We recorded amortization expense of nil for fiscal 2003 and fiscal 2002, and $1.4 million for fiscal 2001. Our adoption of SFAS 142 eliminated the amortization of goodwill beginning in the first quarter of fiscal 2002. The following table shows net loss and net loss per share for the adoption of SFAS 142:
Fiscal 2003 Fiscal 2002 Fiscal 2001 ------------ ----------- ------------ Reported net loss $ (147,024) $(193,509) $ (71,906) Add back: Goodwill amortization, net of tax - - 833 ----------- ---------- ---------- Adjusted net loss $ (147,024) $(193,509) $ (71,073) =========== ========== ========== Net loss per share - basic and diluted: Reported net loss per share $ (3.82) $ (5.03) $ (1.88) Add back: Goodwill amortization - - 0.02 ---------- ---------- ---------- Adjusted net loss per share $ (3.82) $ (5.03) $ (1.86) ========== ========== ==========
Self Insurance Reserves - ----------------------- Our Consolidated Balance Sheets include liabilities with respect to self-insured workers' compensation and general liability claims. The current portion of these liabilities is included in "Other accruals" and the non-current portion is included in "Other non-current liabilities" on our Consolidated Balance Sheets. 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). During fiscal 2003, we recorded a $17.5 million increase in our workers' compensation and general liability reserves in response to both adverse development of prior years' costs and other developments including a continuing trend of rising costs. Closed Store Reserves - --------------------- For stores closed that are under long-term leases, we record a discounted liability using a risk free rate for future minimum lease payments and related costs, such as utilities and taxes, from the date of closure to the end of the remaining lease term, net of estimated probable 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 net future cash flows based on our experience in and knowledge of the market in which the closed store is located. However, these estimates project net cash flow several years into the future and are affected by variable factors such as inflation, real estate markets and economic conditions. While these factors have been relatively stable in recent years, variation in these factors could cause changes to our estimates. 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 is 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 approach and a risk free rate. During fiscal 2003, we recorded total impairment losses on U.S. Retail segment property, plant and equipment of $37.2 million relating to our Farmer Jack stores. Refer to Note 3 - Valuation of Long Lived Assets and Goodwill and Note 4 - Asset Disposition Initiative in the Notes to Consolidated Financial Statements for further discussion relating to impairment charges recorded during the current fiscal year. We also review assets in stores planned for closure or conversion for impairment upon determination that such assets will not be used for their intended useful life. During fiscal 2003, we recorded impairment losses on property, plant and equipment of $25.0 million ($23.3 million in our U.S. Retail segment and $1.7 million in our Canada Retail segment). Of this amount, $4.4 million related to U.S. Retail stores and $1.7 million related to Canada 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 $18.9 million during fiscal 2003 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). Property - -------- Depreciation and amortization are calculated on the straight-line basis over the estimated useful lives of the assets. Buildings are depreciated based on lives varying from twenty to fifty years and equipment is depreciated based on lives varying from three to ten years. Leasehold improvements are amortized over the lesser of their estimated useful lives and the remaining available lease terms. Property leased under capital leases is amortized over the lives of the respective leases or over their economic useful lives, whichever is less. During fiscal 2003, 2002 and 2001, in addition to the impairment losses discussed above, we disposed of and/or wrote down certain assets, which resulted in a pretax net loss of $0.3 million, a pretax net gain of $1.1 million, and a pretax net loss of $0.3 million, respectively. Income Taxes - ------------ We provide deferred income taxes on temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax regulations. A valuation allowance is recorded to reduce a deferred tax asset to the amount expected to be realized. Current Liabilities - ------------------- Certain accounts payable checks issued but not presented to banks frequently result in negative book balances for accounting purposes. Such amounts are classified as "Book overdrafts" on our Consolidated Balance Sheets. We accrue for vested vacation pay earned by our employees. Liabilities for compensated absences of $77.3 million and $84.5 million at February 28, 2004 and February 22, 2003, respectively, are included in "Accrued salaries, wages and benefits" on our Consolidated Balance Sheets. 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:
Fiscal 2003 Fiscal 2002 Fiscal 2001 ---------------- ------------------ ---------------- Net loss, as reported: $ (147,024) $ (193,509) $ (71,906) Deduct/(Add): Stock-based employee compensation income (expense) included in reported net loss, net of related tax effects (151) 449 (449) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (6,509) (8,016) (5,408) -------------- --------------- ------------- Pro forma net loss $ (153,382) $ (201,974) $ (76,865) ============== =============== ============= Net loss per share - basic and diluted: As reported $ (3.82) $ (5.03) $ (1.88) Pro forma $ (3.98) $ (5.25) $ (2.00)
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 fiscal 2003, 2002 and 2001 option grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Fiscal 2003 Fiscal 2002 Fiscal 2001 ------------------ ------------------ ------------------ Expected life 7 years 7 years 7 years Volatility 51% 47% 55% Dividend yield range 0% 0% 0% Risk-free interest rate range 2.71%-4.01% 3.33%-5.18% 4.07%-5.40%
Comprehensive Loss - ------------------ Our Company's other comprehensive loss relates to changes in foreign currency translation, minimum pension liability and unrealized gains or losses on derivatives and securities held for sale. Other comprehensive loss as of February 28, 2004, February 22, 2003 and February 23, 2002 included:
Deferred Tax Gross (Provision)/Benefit Net ------------------- ------------------ ---------------- Foreign currency translation adjustment $ 39,206 $ - $ 39,206 Minimum pension liability adjustment (1,547) - (1,547) Unrealized loss on derivatives (4,972) 1,799 (3,173) ------------------ -------------------- ---------------- Balance at 2/28/04 $ 32,687 $ 1,799 $ 34,486 ================== ==================== ================ Foreign currency translation adjustment $ 15,363 $ - $ 15,363 Reclassification adjustment for gains included in net loss (1,609) 676 (933) Minimum pension liability adjustment (1,613) 74 (1,539) Unrealized gain on derivatives 4,917 (1,902) 3,015 ------------------ -------------------- ---------------- Balance at 2/22/03 $ 17,058 $ (1,152) $ 15,906 ================== ==================== ================ Foreign currency translation adjustment $ (5,089) $ - $ (5,089) Minimum pension liability adjustment (112) 47 (65) Unrealized gain on securities held for sale 1,609 (676) 933 ------------------ -------------------- ---------------- Balance at 2/23/02 $ (3,592) $ (629) $ (4,221) ================== ==================== ================
Translation of Canadian Currency - -------------------------------- Assets and liabilities denominated in Canadian currency are translated at year-end rates of exchange, and revenues and expenses are translated at average rates of exchange during the year. Gains and losses resulting from translation adjustments are accumulated as a separate component of accumulated other comprehensive loss within Stockholders' Equity. 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"). 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. Beginning in fiscal 2003, any gain or loss on extinguishment of debt, previously classified as an extraordinary item in prior periods presented, that does not meet the criteria of APB No. 30 for such classification, will be reclassified to conform to the provisions of SFAS 145. In accordance with SFAS 145, we have reclassified the fiscal 2002 $12.2 million pretax extraordinary gain and the fiscal 2001 $12.4 million pretax extraordinary loss to (loss) income from operations. In addition, we decreased income tax expense by $0.3 million and $5.3 million, respectively, to reclassify the tax benefits of these transactions in accordance with the new accounting standard. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure" ("SFAS 148"), which amends SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In response to a growing number of companies announcing plans to record expenses for the fair value of stock options, SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The amendments to SFAS 123 in paragraphs 2(a)-2(e) of this Statement shall be effective for financial statements for fiscal years ending after December 15, 2002. The disclosure requirements set forth in this statement have been adopted in fiscal 2002 and did not have a significant impact on the financial statements. 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 January 2003 and December 2003, the FASB issued FIN 46 and FIN 46-R, respectively. FIN 46 and FIN 46-R address 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 and FIN 46-R require 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 and FIN 46-R apply 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 and FIN 46-R apply to VIE's no later than the end of the first reporting period ending after March 15, 2004 (the quarter ending June 19, 2004 for our Company). The Interpretations require 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 7, our Company served 63 franchised stores as of February 28, 2004. 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 Note 15 "Operating Segments" and our equipment leases and inventory notes, which totaled $38.6 million at February 28, 2004. We are currently in the process of analyzing the franchisee relationships in accordance with FIN 46 and FIN 46-R to determine if any or all are VIE's. We believe it is likely that these franchisees are VIE's, and that we are the primary beneficiary. Therefore, we would be required to consolidate these entities upon FIN 46 and FIN 46-R becoming effective for our Company. 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 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). The adoption of SFAS 150 did not have a material impact on our financial statements. In November 2003, the Emerging Issues Task Force confirmed as a consensus EITF Issue No. 03-10, "Application of EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, by Resellers to Sales Incentives Offered to Consumers by Manufacturers" ("EITF 03-10"). EITF 03-10 will not impact our Company's existing accounting and reporting policies for manufacturers' coupons that can be presented at any retailer that accepts coupons. For arrangements with vendors that are entered into or modified after February 28, 2004, our Company is required to record the vendor reimbursement as a reduction of cost of sales (instead of sales) if the coupon can only be redeemed at a Company retail store. This modification to our Company's accounting and reporting policies will only impact sales and cost of sales beginning in our Company's first quarter of fiscal 2004 (the quarter ending June 19, 2004) and is not expected to have a material impact on sales or cost of sales. In December 2003, the FASB issued SFAS 132 R, "Employer's Disclosure about Pensions and Other Postretirement Benefits" ("SFAS 132 R"). SFAS 132 R requires new annual disclosures about the type of plan assets, investments strategy, measurement date, plan obligations, and cash flows as well as the components of the net periodic benefit cost recognized in interim periods. The new annual disclosure requirements apply to fiscal years ending after December 15, 2003, except for the disclosure of expected future benefit payments, which must be disclosed for fiscal years ending after June 15, 2004. Interim period disclosures are generally effective for interim periods beginning after December 15, 2003. We have included the disclosures required by SFAS 132 R, including expected future benefit payments, in our consolidated financial statements for the year ended February 28, 2004. During January 2004, the FASB issued FASB Staff Position ("FSP") 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act")", which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act. The guidance in FSP 106-1 is effective for interim or annual financial statements of fiscal years ending after December 7, 2003. The election to defer accounting for the Act is a one-time election that must be made before net periodic postretirement benefit costs for the period that includes the Act's enactment date are first included in reported financial information pursuant to the requirements of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" ("SFAS 106"). Based upon the uncertainties related to the appropriate accounting methodology for this event and in accordance with FSP 106-1, we elected to defer accounting for the effects of the Act and accordingly, the measures of the accumulated postretirement benefit obligations and the net postretirement benefit cost disclosed do not reflect the effects of the Act on the postretirement benefits. We have not determined the impact of the Act on these benefits. Reclassifications - ----------------- Certain reclassifications have been made to prior year amounts to conform to current year presentation. Note 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. These assets were no longer depreciated after this date. 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 "Gain on disposal of discontinued operations, net of tax" on our Consolidated Statements of Operations for fiscal year 2003. Included in these amounts were occupancy related costs for locations not sold of $4.4 million, severance and related costs of $3.5 million, non-accruable closing costs of $5.4 million and a net gain of $0.2 million from inventory disposals. Also, during fiscal 2003, we adopted a formal plan to exit the Milwaukee, Wisconsin market, where our remaining 23 Kohl's stores were located, as well as our Eight O'Clock Coffee business, through the sale and/or disposal of these assets. As a result of this plan, we were able to sell a group of these stores generating proceeds of $10.4 million and a gain of $6.4 million ($3.7 million after tax). This gain is included in "Gain on disposal of discontinued operations, net of tax" on our Consolidated Statements of Operations for fiscal year 2003. Upon the decision to exit the remaining Kohl's stores located in Milwaukee, Wisconsin, and the 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 at the remaining Kohl's locations of $18.9 million, which is included in "Income (loss) from operations of discontinued businesses, net of tax" on our Consolidated Statements of Operations for fiscal year 2003. During fiscal year 2003, we closed the remaining stores in the Milwaukee market that had not been sold and recorded exit costs of $28.1 million relating to future rent vacancy (which consisted of the original vacancy charge of $25.1 million and additional vacancy charges of $3.0 million), $5.7 million in severance charges, $2.0 million in non-accruable closing costs and $1.2 million in inventory markdowns. Such amounts are included in "Income (loss) from operations of discontinued businesses, net of tax" in our Consolidated Statements of Operations for fiscal year 2003. 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 $5.5 million for fiscal year 2003. In addition, we recorded $1.0 million in expense relating to withdrawal from Kohl's health and welfare plan during fiscal year 2003. Such amounts are included in "Income (loss) from operations of discontinued businesses, net of tax" in our Consolidated Statements of Operations for fiscal year 2003. Further, during fiscal year 2003, we experienced favorable results in marketing the closed stores which resulted in additional store sales, sublets, and lease terminations and recorded reversals to our previously recorded reserves of $4.5 million. Recorded on our Consolidated Balance Sheet are the resulting reserves related to the exit of the northern New England and Kohl's markets. The following table summarizes the reserve activity during fiscal 2003:
Severance and Occupancy Benefits Fixed Assets Total ------------ ------------- -------------- ------------ Current year charge (1) $ 29,838 $ 15,732 $ 18,968 $ 64,538 Utilization (2) (8,890) (10,839) (18,968) (38,697) Adjustments (3) (1,458) - - (1,458) ------------ ------------- -------------- ------------ Balance at February 28, 2004 $ 19,490 $ 4,893 $ - $ 24,383 ============ ============= ============== ============
(1) The current year charge to occupancy consists of $29.5 million related to future occupancy costs and $0.3 million of present value of accrued interest related to lease obligations. The current year charge to severance and benefits of $15.7 million related to severance costs of $9.2 million and costs for future obligations for early withdrawal from multi-employer union pension plans and a health and welfare plan as described above of $6.5 million. The current year charge to fixed assets of $18.9 million represents the impairment losses on property, plant and equipment at certain Kohl's locations. (2) Occupancy utilization represents vacancy related payments for closed locations. Severance and benefits utilization represents payments made to terminated employees during the period and payments for pension withdrawal. (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 $1.5 million primarily related to reversals of previously accrued vacancy related costs due to favorable results of terminating and subleasing certain locations of $4.5 million offset by additional vacancy accruals of $3.0 million. As of February 28, 2004, we had paid approximately $10.8 million of the total original severance and benefits charge recorded, which resulted from the termination of approximately 2,150 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 2004. At February 28, 2004, $5.5 million of the northern New England and Kohl's exit reserves were included in "Other accruals" and $18.9 million were included in "Other non-current liabilities" on our Consolidated Balance Sheets. We have evaluated the liability balance of $24.4 million as of February 28, 2004 based upon current available information 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. During fiscal year 2003, we completed the sale of our Eight O'Clock Coffee business, generating gross proceeds of $107.5 million and a gain of $75.1 million ($43.6 million after tax). This gain is included in "Gain on disposal of discontinued operations, net of tax" on our Consolidated Statements of Operations for fiscal year 2003. The sale of the coffee business also included a contingent note for up to $20.0 million, the value and payment of which is based upon certain elements of the future performance of the Eight O'Clock Coffee business and therefore is not included in the gain. 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 "Income (loss) from operations of discontinued businesses, net of tax".
Fiscal Year Ended --------------------------------------------------------------------------- Feb. 28, 2004 Feb. 22, 2003 Feb. 23, 2002 ---------------------- --------------------- ---------------------- Sales $ 221,220 $ 697,589 $ 767,070 Operating expenses (273,260) (684,408) (747,265) ----------------- -------------- -------------- (Loss) income from operations (52,040) 13,181 19,805 Benefit from (provision for) income taxes 21,857 (5,536) (8,318) ---------------- -------------- -------------- (Loss) income from operations of discontinued businesses $ (30,183) $ 7,645 $ 11,487 ================= ============= ============= Depreciation and amortization $ 1,610 $ 13,515 $ 15,171 ================ ============= =============
Note 3 -- Valuation of Long Lived Assets and Goodwill In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). As disclosed previously, goodwill will no longer be amortized but will be subject to impairment tests on an annual basis and whenever events or circumstances occur indicating that the goodwill may be impaired. SFAS 142 was effective for our Company on February 24, 2002. We completed our initial impairment review during the second quarter of fiscal 2002 and concluded a transitional impairment charge from the adoption of the standard was not required. In accordance with the standard, we selected our fiscal fourth quarter to conduct our annual impairment test for goodwill. However, through the third quarter of fiscal 2003, we experienced operating losses for the past two years for one of our Farmer Jack asset groups, which we believe is a triggering event under SFAS 144 for potential impairment of the asset group's long lived assets. In addition, the triggering event under SFAS 144 also triggered testing Farmer Jack's goodwill for potential impairment under SFAS 142. To assess Farmer Jack's goodwill for impairment under SFAS 142, we performed an assessment of the carrying value of the reporting unit to determine if the fair value of the reporting unit was below its carrying value. The fair value of the Farmer Jack reporting unit was determined through internal analysis and a valuation performed by an independent third party appraiser, primarily using the discounted cash flow approach based on forward looking information regarding revenues and costs of Farmer Jack. This valuation was based on a number of estimates and assumptions, including the projected future operating results of Farmer Jack, discount rate, and long term growth rate. As a result of this review, we determined that the fair value of Farmer Jack was below its carrying value and that the carrying value of the reporting unit goodwill exceeded its implied fair value (defined as the fair value of the reporting unit less the fair value of all assets and liabilities other than goodwill). Further, based upon the analysis, we concluded that Farmer Jack's goodwill was entirely impaired and we recorded an impairment charge of $27.0 million as a component of operating income in "Store operating, general and administrative expense" in our Consolidated Statements of Operations for fiscal year 2003. Farmer Jack's goodwill of $27.0 million was classified in "Other assets" in our Consolidated Balance Sheet at February 22, 2003. In accordance with SFAS 144, we review the carrying value 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 these assets is recoverable from their respective cash flows. If such review indicates an impairment exists, we measure such impairment on a discounted basis. In connection with the goodwill impairment test, we reviewed the carrying value of all of Farmer Jack's long-lived assets for potential impairment under SFAS 144. We estimated Farmer Jack's future cash flows from its long-lived assets based on internal analysis and valuations performed by an independent third party appraiser. For those asset groups for which the carrying value was not recoverable from their future cash flows, we determined the fair value of the related assets based on the same analysis, primarily using the discounted cash flow approach. As a result of this review, we recorded an impairment charge for Farmer Jack's long-lived assets of $33.1 million, which is recorded as a component of operating income in "Store operating, general and administrative expense" in our Consolidated Statements of Operations for fiscal year 2003. In addition, during the fourth quarter of fiscal 2003, the Board of Directors approved a plan to close, sell or convert several of our Farmer Jack stores located in the Detroit, Michigan and Toledo, Ohio markets. As a result, additional impairments totaling $4.1 million were recorded for the stores currently held for closure, sale or conversion during the fourth quarter of fiscal 2003. We also review assets in stores planned for closure or conversion for impairment upon determination that such assets will not be used for their intended useful life. During fiscal 2003, we recorded additional impairment losses on property, plant and equipment of $25.0 million ($23.3 million in our U.S. Retail segment and $1.7 million in our Canada Retail segment) compared to $18.9 million recorded during fiscal year 2002 ($15.7 million in our U.S. Retail segment and $3.2 million in our Canada Retail segment). Of these amounts recorded in fiscal 2003 and fiscal 2002, $4.4 million and $15.7 million, respectively, related to U.S. Retail stores and $1.7 million and $3.2 million, respectively, related to Canada Retail stores that were or will be closed in the normal course of business. These amounts are included in "Store operating, general and administrative expense" in our Consolidated Statements of Operations. The remaining impairment losses we recorded of $18.9 million during fiscal 2003 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). If current operating levels and trends continue, there may be additional future impairments on long-lived assets, including the potential for impairment of assets that are held and used. Note 4 -- 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. During the fourth quarter of fiscal 2003, we announced an initiative to close 5 stores and convert 13 stores to our Food Basics format in the Detroit, Michigan and Toledo, Ohio markets. As a result, we recorded a charge of $37.7 million ($2.2 million in "Cost of merchandise sold" and $35.5 million in "Store operating, general and administrative expense" in our Consolidated Statement of Operations for fiscal 2003) as follows: Fiscal 2003 -------------------- Occupancy related $ 20,999 Severance and benefits 8,930 Fixed asset writeoffs 4,129 Nonaccruable closing costs 1,449 Inventory markdowns 2,244 -------------------- Total charges $ 37,751 ==================== As of February 28, 2004, we had 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 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) 26,553 8,930 4,129 39,612 Utilization (2) (32,053) (7,883) (4,129) (44,065) Adjustments (3) (5,776) 1,558 - (4,218) ------------ ------------- -------------- ------------ Balance at February 28, 2004 $ 91,845 $ 9,345 $ - $ 101,190 ============ ============= ============== ============
(1) The additions to occupancy during fiscal 2003 represent charges related to closures and conversions in the Detroit, Michigan market of $21.0 million and the present value of accrued interest related to lease obligations of $5.6 million. The addition to severance during fiscal 2002 related to retention and productivity incentives that were accrued as earned, and the addition in fiscal 2003 related to a voluntary termination plan initiated in the Detroit, Michigan market. (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 $4.2 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 $3.2 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 described above, during fiscal 2003, we recorded a net charge of $33.5 million to our Consolidated Statements of Operations reflecting a $37.7 million charge relating to our Farmer Jack restructuring program offset by a $4.2 million net gain relating to reversals of previously accrued vacancy related costs. During fiscal 2002, we recorded a net gain of $6.4 million to our Consolidated Statement of Operations reflecting a $13.7 million gain primarily relating to reversals of previously accrued vacancy related costs offset by a $7.3 million charge for non-accruable store inventory markdowns and closing costs. As of February 28, 2004, we had paid approximately $59.3 million of the total original severance and benefits charge recorded, which resulted from the termination of approximately 4,800 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 2005. At February 28, 2004, approximately $26.8 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 fiscal 2003, 2002 and 2001 are the sales and operating results of the aforementioned permanently closed stores while they were open during the periods presented. The results of these operations are as follows: Fiscal 2003 Fiscal 2002 Fiscal 2001 ----------- ------------ ----------- Sales $41,810 $ 68,776 $306,220 ======= =========== ======== Operating loss $(8,034) $ (5,371) $(25,556) ======= =========== ======== We have evaluated the liability balance of $101 million as of February 28, 2004 based upon current available information 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. Note 5 - Properties Held for Sale 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. Upon the announcement of the sale of these stores, we applied the provisions of SFAS 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, $22.1 million in net property, plant and equipment were reclassified as of February 22, 2003, and included in "Prepaid expenses and other current assets" on our Consolidated Balance Sheets. As of April 2003, these stores were sold. Refer to Note 2 of our Consolidated Financial Statements. In accordance with the provisions of SFAS 144, the properties held for sale included in "Prepaid expenses and other current assets" in our Consolidated Balance Sheets as of February 28, 2004 and February 22, 2003 are no longer being depreciated. Note 6 - Inventory Approximately 6% and 13% of our inventories are valued using the last-in, first-out ("LIFO") method at February 28, 2004 and February 22, 2003. Such inventories would have been $17.3 million and $17.5 million higher at February 28, 2004 and February 22, 2003, respectively, if the retail and first-in, first-out methods were used. We recorded LIFO credits of $0.2 million in fiscal 2003 and $1.1 million in fiscal 2002 as compared to a LIFO charge of $0.5 million in fiscal 2001. Liquidation of LIFO layers in the periods reported did not have a significant effect on the results of operations. Note 7 - Wholesale Franchise Business We serviced 63 franchised stores as of February 28, 2004 and 65 franchised stores as of February 22, 2003 in Canada. These franchisees are required to purchase inventory exclusively from the Company, which acts as a wholesaler to the franchisees. During fiscal 2003, 2002 and 2001, we had wholesale sales to these franchised stores of $814 million, $713 million and $677 million, respectively. A majority of the franchised stores were converted from our operated supermarkets. 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 mainly represents the reimbursement of costs incurred to provide such services. Our Company holds as assets inventory notes collateralized by the inventory in the stores and equipment lease receivables collateralized by the equipment in the stores. The current portion of the inventory notes and equipment leases amounting to approximately $6.4 million and $3.6 million were included in "Accounts receivable" on our Consolidated Balance Sheets at February 28, 2004 and February 22, 2003, respectively. The long-term portion of the inventory notes and equipment leases, net of the allowance for doubtful accounts, totaling approximately $32.2 million and $41.1 million, were included in "Other assets" on our Consolidated Balance Sheets at February 28, 2004 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. Included below are the amounts due to our Company for the next five years and thereafter from the franchised stores for equipment leases and inventory notes. The current portion of such amounts is included in "Accounts receivable" and the non-current portion is included in "Other assets" in our Consolidated Balance Sheets.
Allowance For Equipment Inventory Doubtful Fiscal Leases Notes Accounts Total ------ ------------- ------------- ------------- ------------- 2004 $ 9,101 $ 960 $ - $ 10,061 2005 8,416 1,497 (993) 8,920 2006 8,413 1,734 (1,150) 8,997 2007 5,897 2,057 (1,365) 6,589 2008 7,249 2,530 (1,678) 8,101 2009 and thereafter 5,865 3,190 (2,117) 6,938 ------------- ------------- --------------- ------------- 44,941 11,968 (7,303) 49,606 Less interest portion (11,011) - - (11,011) ------------- ------------- ------------- ------------- Due from franchise business $ 33,930 $ 11,968 $ (7,303) $ 38,595 ============= ============= ============= =============
For fiscal 2003, 2002 and 2001, approximately $3 million, $2 million and $1 million, respectively, of the amounts due from franchisees relate to equipment leases which were non-cash transactions and, accordingly, have been excluded from our Consolidated Statements of Cash Flows. Refer to Note 1 - 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") and the revised version of FIN 46 ("FIN 46-R"). Refer to Note 14 - Commitments and Contingencies regarding a pending class action lawsuit relating to our Canadian franchise business. Note 8 - Indebtedness Debt consists of the following:
February 28, February 22, 2004 2003 --------------- ---------------- 9.375% Notes, due August 1, 2039 $ 200,000 $ 200,000 9.125% Senior Notes, due December 15, 2011 216,500 230,500 7.75% Notes, due April 15, 2007 219,515 229,265 7.70% Senior Notes, due January 15, 2004 - 22,100 On balance sheet financing, due February 2021 through February 2026 181,442 - Deferred gain from termination of interest rate swaps 7,600 10,008 Mortgages and Other Notes, due 2003 through 2018 (average interest rates at year end of 8.00% and 7.58%, respectively) 1,676 3,204 U.S. bank borrowings at 4.125% - 135,000 Less unamortized discount on 7.75% Notes (724) (980) ----------- ----------- 826,009 829,097 Less current portion of long-term debt (2,271) (25,820) ----------- ----------- Long-term debt $ 823,738 $ 803,277 =========== ===========
During fiscal 2003, we amended and restated our Secured Credit Agreement (the "Amended and Restated Credit Agreement") and decreased our borrowing base to $400 million. Thus, at February 28, 2004, we had a $400 million secured revolving 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 amended facility provides us with greater operating flexibility and provides for increased capital spending. Under the Amended and Restated Credit Agreement, there are no financial covenants as long as availability under the agreement exceeds $50 million. The Amended and Restated Credit Agreement is comprised of a U.S. credit agreement amounting to $330 million and a Canadian credit agreement amounting to $70 million (C$93.5 million at February 28, 2004) and is collateralized by inventory, certain accounts receivable and certain pharmacy scripts. Borrowings under the Amended and Restated Credit Agreement bear interest based on LIBOR and Prime interest rate pricing. This agreement expires in December 2007. As of February 28, 2004, there were no borrowings under these credit agreements. As of February 28, 2004, after reducing availability for outstanding letters of credit and borrowing base requirements, we had $213.0 million available under the Amended and Restated Credit Agreement. During fiscal 2003, we repurchased in the open market $9.8 million of our 7.75% Notes due April 15, 2007 and $14.0 million of our 9.125% Notes due December 15, 2011. These open market repurchases resulted in a net gain due to the early extinguishment of debt of $1.9 million, which has been classified within income from operations in accordance with SFAS 145, "Rescission of FASB Statements 4, 44 and 64, Amendment of FASB 13, and Technical Corrections". During fiscal 2002, we repurchased in the open market $50.7 million of our 7.75% Notes due April 15, 2007 and $44.5 million of our 9.125% Notes due December 15, 2011. These open market repurchases resulted in a net gain due to the early extinguishment of debt of $12.2 million. In accordance with SFAS 145, this gain has been reclassified within income from operations for fiscal 2002. Under the Amended and Restated Credit Agreement, we are permitted to make bond repurchases and may do so from time to time in the future. During fiscal 2003, we sold 13 properties and simultaneously leased them back from the purchaser resulting in an on balance sheet financing. Refer to Note 16 - Sale-Leaseback Transactions for further discussion of this transaction. As of February 28, 2004 and February 22, 2003, we had no borrowings under uncommitted lines of credit. The net book value of real estate pledged as collateral for all mortgage loans amounted to nil at February 28, 2004 and $3.2 million at February 22, 2003. The net book value of real estate pledged as collateral for our $400 million Secured Credit Agreement amounted to $22.8 million at February 28, 2004 and $82.9 million at February 22, 2003 under the prior year agreement. This decrease in properties pledged as collateral is mainly due to the sale of properties in fiscal 2003 as part of our sale leaseback transaction. 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 February 28, 2004 at terms contingent upon market conditions at the time of sale. Maturities for the next five fiscal years and thereafter are: 2004 - $2.3 million; 2005 - $2.3 million; 2006 - $2.2 million; 2007 - $219.9 million; 2008 - $0.1 million; 2009 and thereafter - $599.2 million. Interest payments on indebtedness were approximately $63 million for fiscal 2003, $68 million for fiscal 2002 and $60 million for fiscal 2001. Note 9 - Fair Value of Financial Instruments The estimated fair values of our financial instruments are as follows:
February 28, 2004 February 22, 2003 ------------------------------ ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ------------- ------------- ------------- ------------- 9.375% Notes, due August 1, 2039 $ 200,000 $ 180,080 $ 200,000 $ 135,600 9.125% Senior Notes, due December 15, 2011 216,500 186,731 230,500 186,705 7.75% Notes, due April 15, 2007 218,791 197,743 228,285 182,628 7.70% Senior Notes, due January 15, 2004 - - 22,100 21,216 On balance sheet financing, due February 2021 through February 2026 181,442 181,442 - - Mortgages and Other Notes, due 2003 through 2018 1,676 1,676 3,204 3,204 U.S. Bank borrowings at 4.125% - - 135,000 135,000
Fair value for the public debt securities is based on quoted market prices. As of February 28, 2004 and February 22, 2003, the carrying values of cash and cash equivalents, accounts receivable and accounts payable approximated fair values due to the short-term maturities of these instruments. Note 10 - Lease Obligations We operate primarily in leased facilities. Lease terms generally range up to twenty-five years for store leases and thirty years for other leased facilities, with options to renew for additional periods. In addition, we also lease some store equipment and trucks. The majority of the leases contain escalation clauses relating to real estate tax increases and certain store leases provide for increases in rentals when sales exceed specified levels. The Consolidated Balance Sheets include the following: February 28, February 22, 2004 2003 ------------- ------------ Property under capital leases $ 179,667 $ 178,491 Accumulated amortization (114,035) (106,685) ----------- ----------- Net property under capital leases $ 65,632 $ 71,806 =========== =========== During fiscal 2003 and fiscal 2001, we did not enter into any new capital leases. During fiscal 2002, we entered into new capital leases totaling $9 million. These capital lease amounts are non-cash transactions and, accordingly, have been excluded from the Consolidated Statements of Cash Flows. Interest paid as part of capital lease obligations was approximately $10 million in fiscal 2003, $11 million in fiscal 2002 and $13 million in fiscal 2001. Rent expense for operating leases during the last three fiscal years consisted of the following: Fiscal 2003 Fiscal 2002 Fiscal 2001 ----------- ------------ ----------- Minimum rentals $ 274,684 $ 273,396 $ 249,509 Contingent rentals 4,500 4,551 4,126 ----------- ----------- ----------- Total rent expense $ 279,184 $ 277,947 $ 253,635 =========== =========== =========== Future minimum annual lease payments for capital leases and noncancelable operating leases in effect at February 28, 2004 are shown in the table below. All amounts are exclusive of lease obligations and sublease rentals applicable to facilities for which reserves have previously been established. In addition, we sublease 63 stores to the franchise business. Included in the operating lease column in the table below are the rental payments to be made by our Company partially offset by the rental income to be received from the franchised stores. Capital Operating Fiscal Leases Leases ------ ------------- ------------- 2004 $ 24,414 $ 246,063 2005 14,901 242,292 2006 13,443 236,770 2007 11,732 228,292 2008 10,336 215,962 2009 and thereafter 101,673 2,112,548 ------------ ------------- 176,499 $ 3,281,927 ============= Less executory costs (201) ------------ Net minimum rentals 176,298 Less interest portion (86,417) ------------ Present value of net minimum rentals $ 89,881 ============ Note 11 - Income Taxes The components of loss from continuing operations before income taxes are as follows: Fiscal 2003 Fiscal 2002 Fiscal 2001 ------------- --------------- --------------- United States $ (270,717) $ (136,737) $(183,813) Canada 27,699 66,213 43,282 ----------- ------------ ---------- Total $ (243,018) $ (70,524) $(140,531) ============ ============= ========== The benefit from (provision for) income taxes from continuing operations consists of the following: Fiscal 2003 Fiscal 2002 Fiscal 2001 ---------------- --------------- ------------ Current: Federal $ - $ 24,166 $ - Canadian (1,998) (1,162) (708) State and local (4,239) (3,104) (3,000) -------------- ------------ -------- (6,237) 19,900 (3,708) -------------- ------------ -------- Deferred: Federal 34,636 (94,157) 56,448 Canadian (8,670) (24,849) (19,336) State and local 11,942 (31,524) 23,734 -------------- ------------ --------- 37,908 (150,530) 60,846 -------------- ------------ --------- Benefit from (provision for) income taxes $ 31,671 $ (130,630) $ 57,138 ============== ============ ========= 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." The deferred income tax (provision) benefit resulted primarily from the annual change in temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax regulations, net operating loss ("NOL") carryforwards and, in fiscal 2003 and fiscal 2002, the U.S. valuation allowance. The deferred tax provision recorded in fiscal 2003 for our Canadian operations of approximately $8.7 million reflects the utilization of $7.1 million of NOL carryforwards and other temporary differences. The deferred tax provision recorded in fiscal 2002 for our U.S. operations of approximately $125.7 million mainly relates to NOL carryforwards and the U.S. related valuation allowance. In accordance with SFAS 109 "Accounting for Income Taxes", a valuation allowance is created and offset against the 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 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 $133.7 million during the second quarter of fiscal 2002. During the remainder of fiscal 2002, the valuation allowance was increased by $27.8 million, totaling $161.5 million for the fiscal year. In future periods, U.S. losses will not be tax effected until such time as the certainty of future tax benefits can be reasonably assured. The valuation allowance will be adjusted when and if, in our opinion, significant positive evidence exists which indicates that it is more likely than not that we will be able to realize the U.S. deferred tax asset. As of February 28, 2004, we had NOL carryforwards of approximately $622 million from our U.S. operations, which will expire between February 2019 and February 2024. We have not recorded deferred income taxes on the undistributed earnings of our foreign subsidiaries because of our intent to indefinitely reinvest such earnings. At February 28, 2004, the undistributed earnings of the foreign subsidiaries amounted to approximately $191.9 million. Upon distribution of these earnings in the form of dividends or otherwise, we may be subject to U.S. income taxes and foreign withholding taxes. It is not practical, however, to estimate the amount of taxes that might be payable on the eventual remittance of these earnings. A reconciliation of income taxes from continuing operations at the 35% federal statutory income tax rate for fiscal 2003, 2002 and 2001 to income taxes as reported is as follows:
Fiscal 2003 Fiscal 2002 Fiscal 2001 ---------------- --------------- --------------- Income tax benefit from continuing operations computed at federal statutory income tax rate $ 85,056 $ 24,684 $ 49,187 State and local income taxes, net of federal tax benefit 5,007 (22,508) 13,477 Tax rate differential relating to Canadian operations (973) (2,836) (4,896) Goodwill and other permanent differences (378) (285) (630) U.S. valuation allowance (57,041) (129,685) - ----------- ------------ ---------- Income tax benefit (provision), as reported $ 31,671 $ (130,630) $ 57,138 =========== ============ ==========
Income tax payments, net of income tax refunds, for fiscal 2003 and 2001 were approximately $4.2 million and $0.2 million, respectively. Income tax refunds, net of income tax payments for fiscal 2002, were approximately $10.0 million. The components of net deferred tax assets (liabilities) are as follows:
February 28, February 22, 2004 2003 ------------- ------------- Current assets: Insurance reserves $ 27,220 $ 25,533 Other reserves and accrued benefits 17,205 43,813 Accrued postretirement and postemployment benefits 756 756 Lease obligations 769 775 Pension obligations 997 3,188 Miscellaneous 2,910 5,181 ------------- ------------- 49,857 79,246 ------------- ------------- Current liabilities: Inventories (6,205) (8,736) Health and welfare (9,490) (8,267) Miscellaneous (2,316) (2,304) -------------- ------------- (18,011) (19,307) -------------- ------------- Valuation allowance (31,488) (58,312) -------------- -------------- Deferred income taxes included in prepaid expenses and other current assets $ 358 $ 1,627 ============= ============= Non-current assets: Alternative minimum tax credits $ 31,984 $ 31,984 Other reserves including asset disposition charges 76,532 75,828 Lease obligations 9,258 8,387 NOL carryforwards 257,049 181,938 Insurance reserves 16,800 16,800 Accrued postretirement and postemployment benefits 26,600 23,535 Pension obligations 10,970 11,293 Step rents 24,409 24,066 State tax 5,000 - Miscellaneous 8,248 2,736 ------------- ------------- 466,850 376,567 ------------- ------------- Non-current liabilities: Depreciation (254,276) (255,683) Pension obligations (27,882) (19,927) Unrealized gain on derivatives (103) (1,902) Miscellaneous (804) (2,375) -------------- -------------- (283,065) (279,887) -------------- -------------- Valuation allowance (197,688) (103,182) -------------- -------------- Net non-current deferred income tax liability included in Other non-current liabilities $ (13,903) $ (6,502) ============== ==============
Note 12 - Retirement Plans and Benefits Defined Benefit Plans We provide retirement benefits to certain non-union and union employees under various defined benefit plans. Our defined benefit pension plans are non-contributory and benefits under these plans are generally determined based upon years of service and, for salaried employees, compensation. We fund these plans in amounts consistent with the statutory funding requirements. The components of net pension cost (income) were as follows:
2003 2002 2001 ------------------------ --------------------- --------------------- U.S. Canada U.S. Canada U.S. Canada --------- ---------- -------- -------- --------- ------ Service cost $ 3,276 $ 6,954 $ 3,344 $ 5,416 $ 4,023 $ 4,656 Interest cost 9,138 11,783 9,372 9,753 9,659 9,386 Expected return on plan assets (10,337) (15,138) (12,057) (14,827) (12,627) (14,489) Amortization of unrecognized net asset (13) (442) (13) (665) (13) (749) Amortization of unrecognized net prior service cost 147 335 292 294 291 293 Amortization of unrecognized net actuarial gain (74) 584 (1,473) (47) (1,865) (135) Curtailments and settlements (1,696) - - - - - Administrative expenses and other - 253 - 215 - 569 --------- ---------- -------- -------- --------- --------- Net pension cost (income) $ 441 $ 4,329 $ (535) $ 139 $ (532) $ (469) ========= ========== ========= ======== ========== ==========
Our U.S. and Canadian defined benefit pension plans use December 31 as their measurement date. The following tables set forth the change in benefit obligations, the change in plan assets, and the accumulated benefit obligation for fiscal 2003 and 2002 for our defined benefit plans:
2003 2002 --------------------------- --------------------------- Change in Benefit Obligation U.S. Canada U.S. Canada ---------------------------- ----------- ---------- ----------- ----------- Benefit obligation - beginning of year $ 145,916 $ 169,084 $ 139,985 $ 150,895 Service cost 3,276 6,954 3,344 5,416 Interest cost 9,138 11,783 9,372 9,753 Actuarial loss 8,971 14,293 6,409 2,737 Benefits paid (6,704) (10,121) (13,194) (9,214) Amendments (5) - - - Settlements (12,975) - - - Effect of exchange rate - 21,938 - 9,497 ---------- --------- ----------- ----------- Benefit obligation - end of year $ 147,617 $ 213,931 $ 145,916 $ 169,084 ========== ========= =========== =========== Change in Plan Assets Plan assets at fair value - beginning of year $ 144,557 $ 176,751 $ 157,974 $ 176,396 Actual return on plan assets 21,571 29,602 (2,230) (6,852) Company contributions 2,118 9,520 2,007 6,059 Benefits paid (6,704) (10,121) (13,194) (9,214) Settlements (12,975) - - - Effect of exchange rate - 23,045 - 10,362 ---------- --------- ----------- ----------- Plan assets at fair value - end of year $ 148,567 $ 228,797 $ 144,557 $ 176,751 ========== ========= =========== =========== Accumulated Benefit Obligation $ 145,275 $ 205,687 $ 143,680 $ 161,137 ------------------------------ ========== ========= =========== ===========
Plans with accumulated benefit obligation in excess of plan assets consisted of the following and only relate to U.S. plans:
2003 2002 ------------- ------------- Accumulated benefit obligation $ 27,637 $ 26,237 Projected benefit obligation $ 27,857 $ 26,289 Plan assets at fair value $ 407 $ 335
Amounts recognized on our Consolidated Balance Sheets consisted of the following:
2003 2002 --------------------------- --------------------------- U.S. Canada U.S. Canada ----------- ---------- ----------- ----------- Plan assets in excess of projected benefit obligation $ 950 $ 14,867 $ (1,359) $ 7,667 Unrecognized net transition asset (12) - (26) (401) Unrecognized prior service cost 401 1,366 554 1,518 Unrecognized net actuarial (gain) loss (13,774) 38,640 (13,296) 35,207 ---------- --------- ----------- ----------- Total recognized on the Consolidated Balance Sheets $ (12,435) $ 54,873 $ (14,127) $ 43,991 ========== ========= =========== =========== 2003 2002 --------------------------- --------------------------- U.S. Canada U.S. Canada ----------- ---------- ----------- ----------- Prepaid benefit cost $ 19,408 $ 54,873 $ 16,028 $ 43,991 Accrued benefit liability (35,384) - (32,548) - Intangible asset 353 - 752 - Accumulated other comprehensive income 3,188 - 1,641 - ---------- -------- ----------- ----------- Total recognized on the Consolidated Balance Sheets $ (12,435) $ 54,873 $ (14,127) $ 43,991 ========== ========= ============ ===========
The prepaid pension asset is included in "Other assets" on the Consolidated Balance Sheets while the pension liability is included in "Accrued salaries, wages and benefits" and "Other non-current liabilities". At February 28, 2004 and February 22, 2003, our additional minimum pension liability for our defined benefit plans exceeded the aggregate of the unrecognized prior service costs and the net transition obligation. Accordingly, stockholders' equity was reduced by $1.5 million and $1.5 million, respectively. The weighted average assumptions in the following table represent the rates used to develop the actuarial present value of projected benefit obligation for the year listed and also the net periodic benefit cost for the following year:
2003 2002 2001 ----------------------- ----------------------- ----------------------- U.S. Canada U.S. Canada U.S. Canada --------- ----------- -------- ----------- --------- ----------- Weighted average discount rate 6.00% 6.00% 6.50% 6.50% 7.00% 6.50% Weighted average rate of compensation increase 3.00% 3.50% 3.50% 4.00% 4.00% 4.00% Expected long-term rate of return on plan assets 7.00% 7.50% 7.50% 8.50% 8.00% 8.50%
The expected long-term rate of return on plan assets for fiscal 2004 is 7.00% and represents the weighted average of expected returns for each asset category. We determine our expected long-term rate of return based on historical performance, adjusted for current trends. Our defined benefit pension plan weighted average asset allocations by asset category were as follows:
Actual Allocation at December 31, --------------------------------------------------- 2003 2002 Target ----------------------- ----------------------- Allocation U.S. Canada U.S. Canada ----------------------- -------- ----------- --------- ----------- Equities 55 - 75% 59% 60% 57% 61% Bonds 25 - 40% 30% 34% 36% 38% Cash 0 - 10% 11% 6% 7% 1% -------- ----------- --------- ----------- Total 100% 100% 100% 100% ======== =========== ========= ===========
Our defined benefit pension plan has target asset allocation ranges of 25% - 75% for equity and fixed income securities. The Plan's assets are held in trust funds and are actively managed by external fund managers. Equity security investments consist of a broad range of publicly traded securities, ranging from small to large capitalization stocks and are diversified in both growth and value orientated strategies as well as diverse industry sectors. Fixed income securities consist of a broad range of investments including U.S. government securities, corporate debt securities, mortgages and other asset backed obligations. The Plan does not allow for direct investments in the publicly traded securities of our Company and investments in derivatives for speculative purposes. Estimated future defined benefit payments expected to be paid are as follows: U.S. Canada ------ -------- 2004 $ 9,080 $ 10,482 2005 9,219 10,632 2006 9,281 11,006 2007 10,358 11,455 2008 10,587 11,680 Years 2009 - 2013 86,867 66,634 We also expect to contribute $2 million in cash to our defined benefit pension plan in fiscal 2004. Defined Contribution Plans We maintain a defined contribution retirement plan to which we contribute an amount equal to 4% of eligible participants' salaries and a savings plan to which eligible participants may contribute a percentage of eligible salary. We contribute to the savings plan based on specified percentages of the participants' eligible contributions. Participants become fully vested in our contributions after 5 years of service. Our contributions charged to operations for both plans were approximately $13.9 million, $12.6 million and $12.3 million in fiscal years 2003, 2002 and 2001, respectively. Multi-employer Union Pension Plans 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 pension expense for these plans approximated $43.2 million, $40.3 million and $37.5 million in fiscal 2003, 2002 and 2001, respectively. We could, under certain circumstances, be liable for unfunded vested benefits or other expenses of jointly administered union/management plans, which benefits could be significant and material for our Company. At this time, we have not established any liabilities for future withdrawals because such withdrawals from these plans are not probable and the amount cannot be estimated. Postretirement Benefits We provide postretirement health care and life benefits to certain union and non-union employees. We recognize the cost of providing postretirement benefits during employees' active service period. We use a December 31 measurement date for both our U.S. and Canadian postretirement benefits. The components of net postretirement benefits (income) cost are as follows:
52 Weeks Ended ---------------------------------------------------- December 31, December 31, December 31, U.S. Plans 2003 2002 2001 ---------- ----------------- ---------------- ----------------- Service cost $ 240 $ 351 $ 284 Interest cost 1,316 1,419 1,481 Prior service cost (1,347) (1,347) (1,347) Amortization of gain (367) (322) (445) ----------- ----------- ----------- Net postretirement benefits (income) cost $ (158) $ 101 $ (27) =========== =========== =========== 52 Weeks Ended ---------------------------------------------------- December 31, December 31, December 31, Canadian Plans 2003 2002 2001 -------------- ----------------- ---------------- ----------------- Service cost $ 330 $ 302 $ 281 Interest cost 935 885 884 Prior service cost (387) (33) (33) Amortization of loss 327 292 322 ---------- ----------- ----------- Net postretirement benefits cost $ 1,205 $ 1,446 $ 1,454 ========== =========== ===========
The unfunded status of the plans is as follows:
December 31, 2003 December 31, 2002 --------------------------- ---------------------------- U.S. Canada U.S. Canada ----------- ------------- ------------- ------------- Unfunded accumulated benefit obligation at beginning of year $ 20,992 $ 14,753 $ 21,975 $ 13,164 Service cost 240 330 351 302 Interest cost 1,316 935 1,419 885 Plan amendment - (5,954) - - Benefits paid (1,486) (385) (1,912) (737) Actuarial loss (gain) 959 (438) (841) 310 Foreign exchange - 1,745 - 829 ----------- ------------- ------------- ------------- Accumulated benefit obligation at end of year 22,021 10,986 20,992 14,753 Unrecognized net loss (gain) from experience differences 6,420 (5,631) 7,746 (5,693) Unrecognized prior service cost 9,164 6,201 10,511 453 ----------- ------------- ------------- ------------- Accrued postretirement benefit costs at end of year $ 37,605 $ 11,556 $ 39,249 $ 9,513 =========== ============= ============= ============= Assumed discount rate 6.0% 6.0% 6.5% 6.5% =========== ============= ============= =============
The assumed rate of future increase in health care benefit cost for fiscal 2004 was 11.25% - 13.25% and is expected to decline to 5.5% by the year 2020 and remain at that level thereafter. The effect of a 1% change in the assumed health care cost trend rate for each future year on the sum of service and interest cost would either be an increase or decrease of $0.1 million, while the accumulated postretirement benefit obligation would either increase by $1.6 million or decrease by $1.4 million. During January 2004, the FASB issued FASB Staff Position ("FSP") 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act")", which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act. The guidance in FSP 106-1 is effective for interim or annual financial statements of fiscal years ending after December 7, 2003. The election to defer accounting for the Act is a one-time election that must be made before net periodic postretirement benefit costs for the period that includes the Act's enactment date are first included in reported financial information pursuant to the requirements of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" ("SFAS 106"). Based upon the uncertainties related to the appropriate accounting methodology for this event and in accordance with FSP 106-1, we elected to defer accounting for the effects of the Act and accordingly, the measures of the accumulated postretirement benefit obligations and the net postretirement benefit cost shown above do not reflect the effects of the Act on the postretirement benefits. We have not determined the impact of the Act on these benefits. Our election to defer accounting for the effects of the Act may not be changed and the deferral will continue to apply until authoritative guidance on the accounting for the federal subsidy is issued, or the election to defer expires if, subsequent to January 31, 2004, but prior to the issuance of additional authoritative guidance, a significant event occurs that ordinarily would call for remeasurement of a plan's assets and obligations - for example, a plan amendment, settlement, or curtailment. Upon the occurrence of such an event, we would be required to account for that event pursuant to the guidance in SFAS 106 and also reflect in our accounting for postretirement benefits other than pensions our best estimate of the effects of the Act, including the federal subsidy (if applicable based on the terms of the plan and the sponsor's analysis of generally accepted accounting principles) and any effects on participation rates and health care cost estimates. Once final guidance is issued, previously reported information is subject to change. Estimated future postretirement benefit payments expected to be paid are as follows: U.S. Canada -------- ---------- 2004 $ 1,635 $ 443 2005 1,677 461 2006 1,679 482 2007 1,673 496 2008 1,713 508 Years 2009 - 2013 9,215 2,989 Postemployment Benefits We accrue costs for pre-retirement, postemployment benefits provided to former or inactive employees and recognize an obligation for these benefits. The costs of these benefits have been included in operations for each of the three fiscal years in the period ended February 28, 2004. As of February 28, 2004 and February 22, 2003, we had a liability reflected on the Consolidated Balance Sheets of $25.3 million and $22.8 million, respectively, related to such benefits. Note 13 - Stock Options At February 28, 2004, we had four stock-based compensation plans. We apply the principles of APB 25 for stock options and FASB Interpretation No. 28 for Stock Appreciation Rights ("SAR's"). SAR's allow the holder, in lieu of purchasing stock, to receive cash in an amount equal to the excess of the fair market value of common stock on the date of exercise over the option price. Our 1984 Stock Option Plan for officers and key employees, which expired on February 1, 1994, provided for the granting of 1,500,000 shares and was amended as of July 10, 1990 to increase to 1,500,000 the number of options available for grant as either options or SAR's. Such awards were granted at the fair market value of the Company's common stock at the date of grant. Our 1994 Stock Option Plan (the "1994 Plan") for officers and key employees, which expired on March 17, 2004, provided for the granting of 1,500,000 shares as either options or SAR's. In fiscal 2003, the Company granted 46,750 options under this plan. Options and SAR's issued under this plan vest 25% on each issuance anniversary date over a four-year period. Under this plan, options and SAR's were granted at the fair market value of the Company's common stock at the date of grant. Effective July 13, 1999, the Board of Directors and stockholders approved the 1998 Long Term Incentive and Share Award Plan (the "1998 Plan") for our Company's officers and key employees. The 1998 Plan provides for the granting of 5,000,000 shares in the form of options, SAR's or stock awards. During fiscal 2003, the Company granted 1,061,225 options under this plan. As of February 28, 2004, 700,073 options were available for granting. Options and SAR's issued under this plan also vest 25% on each anniversary date of issuance over a four-year period. Such awards are also granted at the fair market value of the Company's common stock at the date of grant. The 1994 Stock Option Plan for Board of Directors (the "1994 Board of Directors' Plan") provides for the granting of 100,000 stock options at the fair market value of our common stock at the date of grant. Options granted under this plan totaled 4,000 in fiscal 2003, 4,000 in fiscal 2002, and 8,000 in fiscal 2001. At February 28, 2004, there were 62,767 options available for grant under this plan. One-third of the options granted on a given date vest on each anniversary date of issuance over a three year period. A summary of option transactions is as follows:
Officers, Key Employees and Directors ------------------------------------- Weighted Average Shares Price ------------- --------- Outstanding February 24, 2001 3,244,664 $ 24.04 Granted 1,506,513 9.48 Canceled or expired (419,780) 25.61 Exercised (20,412) 14.85 ------------- --------- Outstanding February 23, 2002 4,310,985 $ 18.84 Granted 2,078,465 13.17 Canceled or expired (1,240,769) 17.75 Exercised (148,178) 18.94 ------------- --------- Outstanding February 22, 2003 5,000,503 $ 16.75 Granted 1,111,975 4.99 Canceled or expired (750,555) 17.08 Exercised (3,099) 6.71 -------------- --------- Outstanding February 28, 2004 5,358,824 $ 14.24 ============= ========= Exercisable at: February 22, 2003 1,665,327 $ 23.99 February 28, 2004 2,248,825 $ 20.92
The weighted average fair values of options granted during the last three fiscal years are as follows: Fiscal 2001 $ 5.77 Fiscal 2002 $ 7.18 Fiscal 2003 $ 2.75 A summary of stock options outstanding and exercisable at February 28, 2004 is as follows:
Weighted Options Average Weighted Options Weighted Average Range Outstanding Remaining Average Exercisable Average of Grant at Contractual Grant at Grant Prices 2/28/04 Life Price 2/28/04 Price ------------------------ ------------- ------------- -------------- ------------- ------------- $ 4.31 - $ 8.94 1,929,574 9.5 years $ 5.14 255,065 $ 5.55 $ 9.06 - $10.66 978,633 7.1 years $ 9.10 303,253 $ 9.13 $ 11.63 - $16.31 38,000 7.6 years $ 14.03 22,500 $14.49 $ 17.38 - $19.80 1,265,307 7.2 years $ 17.72 651,447 $17.84 $ 21.50 - $30.00 503,350 4.7 years $ 27.74 372,600 $27.81 $ 30.25 - $31.75 345,400 4.7 years $ 31.37 345,400 $31.37 $ 32.31 - $37.00 298,560 5.3 years $ 32.51 298,560 $32.51 ------------- ------- ------------- ------------ 5,358,824 $ 14.24 2,248,825 $20.92 ========= ======= ============= ============
A summary of SAR transactions is as follows: Officers and Key Employees - --------------------------
Price Range Shares Per Share ------------ ------------------- Outstanding February 24, 2001 507,762 $ 21.88 - $45.38 Canceled or expired (265,625) 23.38 - 24.75 Exercised (9,375) 23.38 - 45.38 ------------ ------------------- Outstanding February 23, 2002 232,762 $ 21.88 - $31.63 Canceled or expired (84,000) 23.38 - 27.25 Exercised (16,887) 21.88 - 24.75 ------------ ------------------- Outstanding February 22, 2003 131,875 $ 23.38 - $31.63 Canceled or expired (119,375) 23.38 - 31.63 Exercised - ------------ -------------------- Outstanding February 28, 2004 12,500 $ 31.63 ============ ==================== Exercisable at: February 22, 2003 131,875 $ 23.38 - $31.63 February 28, 2004 12,500 $ 31.63
Note 14 - Commitments and Contingencies In May 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. The parties agreed to settle the case for $3.1 million dollars, and on May 7, 2004, the court accepted the settlement. 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. A majority of the class members have opted out of the proceeding. A&P Canada's appeal of the class certification order was dismissed and the Company is seeking leave to file a further appeal. This suit is scheduled for trial in October 2004. 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. By Opinion & Order entered on September 18, 2003, the District Court dismissed plaintiffs' Complaint without prejudice. On October 13, 2003, after having declined to file a Second Amended Complaint, plaintiffs filed a Notice of Appeal to the United States Court of Appeals for the Third Circuit. The appeal has been fully briefed, and the parties are awaiting further action by the Third Circuit. 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. We adopted the accounting and disclosure requirements of FASB Interpretation 45 ("FIN 45" or the "Interpretation"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34" during fiscal 2002. As required to be disclosed by this interpretation, we are the guarantor of a loan of $2.2 million related to a shopping center, which will expire in 2011. Note 15 - 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 exclusive wholesaler to our franchised stores. The accounting policies for the segments are the same as those described in the summary of significant accounting policies. We measure segment performance based upon (loss) income from operations. Information on segments is as follows:
OPERATING DATA Fiscal 2003 Fiscal 2002 Fiscal 2001 - -------------- ----------------- ------------------ ------------------ Sales U.S. Retail $ 7,562,947 $ 7,427,038 $ 7,723,035 Canada Retail 2,435,703 1,957,257 1,806,705 Canada Wholesale 813,812 712,486 676,506 --------------- --------------- ---------------- Total Company $ 10,812,462 $ 10,096,781 $ 10,206,246 =============== =============== ================ Depreciation and amortization U.S. Retail $ 215,639 $ 210,097 $ 212,086 Canada Retail 51,516 39,973 35,295 Canada Wholesale - - - --------------- --------------- ---------------- Total Company $ 267,155 $ 250,070 $ 247,381 =============== =============== ================ (Loss) income from operations * U.S. Retail $ (221,796) $ (63,187) $ (103,616) Canada Retail 28,774 39,056 21,301 Canada Wholesale 24,533 30,389 26,534 --------------- --------------- ---------------- Total Company $ (168,489) $ 6,258 $ (55,781) ================ =============== ================= Interest expense U.S. Retail $ (73,343) $ (75,919) $ (81,574) Canada Retail (5,412) (6,013) (7,557) Canada Wholesale (3,059) (2,747) (2,591) ---------------- --------------- ---------------- Total Company $ (81,814) $ (84,679) $ (91,722) ================ =============== ================ Interest income U.S. Retail $ 316 $ 2,369 $ 1,377 Canada Retail 3,447 2,083 1,970 Canada Wholesale 3,522 3,445 3,625 --------------- --------------- ---------------- Total Company $ 7,285 $ 7,897 $ 6,972 =============== =============== ================ (Loss) income from continuing operations before income taxes * U.S. Retail $ (294,823) $ (136,737) $ (183,813) Canada Retail 26,809 35,126 15,714 Canada Wholesale 24,996 31,087 27,568 --------------- --------------- ---------------- Total Company $ (243,018) $ (70,524) $ (140,531) ================ =============== ================= * (Loss) income from operations and (loss) income from continuing operations before income taxes for fiscal 2003 exclude U.S. charges to Canada of $24.1 million, which are not considered for management reporting.
February 28, February 22, February 23, FINANCIAL POSITION DATA 2004 2003 2002 - ----------------------- ----------------- ------------------ ------------------ Capital expenditures U.S. Retail $ 73,726 $ 164,586 $ 192,705 Canada Retail 60,951 54,944 53,477 Canada Wholesale - - - --------------- --------------- ---------------- Total Company $ 134,677 $ 219,530 $ 246,182 =============== =============== ================ Total assets U.S. Retail $ 1,985,309 $ 2,216,455 $ 2,599,628 Canada Retail 681,592 597,634 521,278 Canada Wholesale 83,649 71,148 73,358 --------------- --------------- ---------------- Total Company $ 2,750,550 $ 2,885,237 $ 3,194,264 =============== =============== ================ Long-lived assets United States $ 1,081,274 $ 1,318,238 $ 1,451,235 Canada 374,002 323,973 289,088 --------------- --------------- ---------------- Total Company $ 1,455,276 $ 1,642,211 $ 1,740,323 =============== =============== ================
Note 16 - Sale-Leaseback Transactions During fiscal 2001, we sold 7 properties and simultaneously leased them back from the purchaser. The properties subject to this sale had a carrying value of approximately $42.7 million. Net proceeds received related to these transactions amounted to approximately $50.8 million. Of the 7 properties sold, 4 were sold for a profit resulting in a gain after deducting expenses of $11.0 million. Three properties in the aforementioned transaction were sold at a loss of $4.5 million after expenses. The majority of this loss was related to one of these properties, which was anticipated at the end of fiscal 2000, and, accordingly, was recognized in full at that time since the carrying value of such property exceeded its fair value less the cost of disposal. In addition, during fiscal 2001, we sold 2 properties and simultaneously leased them back from the purchaser which were originally recorded as off balance sheet operating leases. However, due to our Company's continuing involvement with these 2 properties, in the fourth quarter of fiscal 2003, an adjustment was made to record these two transactions as financings under the provisions of SFAS 66 "Accounting for Sales of Real Estate" ("SFAS 66"). The impact of these adjustments was immaterial to the fourth quarter and fiscal 2003 as well as to the prior periods to which they relate. The carrying value of these 2 properties of approximately $8.3 million has been recorded on our Consolidated Balance Sheet and the sale has been reversed. In addition, the sales prices of these properties of $14.9 million have been recorded as financing obligations with maturities of 17 and 22 years, respectively, within "Long term debt" on our Consolidated Balance Sheet at February 28, 2004. The aforementioned sales plus other sales that have been completed in prior years resulted in a combined gain of $55.1 million, which has been deferred in our Consolidated Balances Sheets and is being amortized over the lives of the respective leases as a reduction of rental expense. Approximately $2.8 million of this gain is included in "Other accruals" and the remainder is included "Other non-current liabilities" in our Consolidated Balance Sheets. During fiscal 2003, we recognized a gain of $4.7 million, of which $2.3 million related to the deferred gain that was recognized as a result of the sale of the Landover coffee plant, compared to a gain of $3.0 million during fiscal 2002. The remaining deferred gain at February 28, 2004 amounted to $48.3 million. On February 27, 2004, we sold 13 properties and simultaneously leased them back from the purchaser. However, due to our Company's continuing involvement with these properties, the sale did not qualify for sale-leaseback accounting in accordance with SFAS 98, "Accounting for Leases" but rather as a financing under the provisions of SFAS 66. In accordance with SFAS 66, the carrying value of these properties of approximately $73.6 million remained on our Consolidated Balance Sheet and no sale was recognized. Instead, the sales price of these properties of $166.5 million was recorded as a financing obligation with a maturity of 20 years, with the exception of one property that has a maturity of 22 years, within "Long term debt" on our Consolidated Balance Sheet at February 28, 2004. In addition, all lease payments are being expensed to "Interest expense" in our Consolidated Statements of Operations. Of the 13 properties sold, all were sold for a profit resulting in a gain, after deducting expenses, which has been deferred and will not be recognized until the end of the respective leases when our continuing involvement ceases. We expect to enter into similar transactions for other owned properties from time to time in the future. Note 17 - Gain On Proceeds From The Demutualization Of A Mutual Insurance Company During fiscal 2001, we received $60.6 million from the demutualization of The Prudential Insurance Company. This consisted of cash of $35.2 million, and common stock of $25.4 million, which is included in "Prepaid expenses and other current assets," in our Consolidated Balance Sheets at February 23, 2002. This amount was recorded as a nonrecurring gain and included in the determination of income (loss) from operations and net cash provided by operating activities in fiscal 2001. At February 23, 2002, we had an unrealized gain of $0.9 million, net of tax, related to the common stock held as available for sale securities that was recorded as a separate component of Stockholders' Equity. During fiscal 2002, we sold our remaining holdings in this common stock and recognized a gain of $1.7 million. This gain was included in "Store operating, general and administrative expense" on our Consolidated Statements of Operations for fiscal 2002. Note 18 - Related Party Transactions A&P Properties Limited, a subsidiary of our Company, leases a store in Windsor, Ontario, Canada from Tenga Capital Corporation, which is owned by Erivan and Helga Haub. Erivan Haub is the father of Christian W. E. Haub, our Chairman of the Board, President and Chief Executive Officer, and is a general partner, together with Tengelmann Verwaltungs- und Beteiligungs GmbH, Karl Erivan Warder Haub and Christian W. E. Haub of Tengelmann, which owns a controlling interest of our common stock. Helga Haub is the mother of Christian W. E. Haub and is a member of our Board of Directors. The lease, which commenced in 1983 and expires on October 31, 2013, includes four 5-year renewal options. The base annual rental was C$0.5 million (U.S. $0.4 million) until October 31, 2003, when it decreased to C$0.4 million (U.S. $0.3 million). Prior to fiscal 2003, we were a party to agreements granting Tengelmann and its affiliates the exclusive right to use the "A&P(R)" and "Master Choice(R)" trademarks in certain European countries pursuant to which we received $0.1 million during each of fiscal 2002 and 2001, which is the maximum annual royalty fee under such agreements. Beginning in fiscal 2003, all such material agreements were canceled. Royalties for use of our trademarks in Germany were paid at the commencement of that license in 1979. We are also a party to agreements under which we purchased from Wissoll, which was formally an affiliate of Tengelmann, approximately $0.3 million, $0.7 million and $0.6 million worth of the Black Forest line and Master Choice(R) candy during fiscal 2003, 2002 and 2001, respectively. During fiscal 2003, we entered into a three year agreement with OBI International Development and Service GMBH ("OBI International"), a subsidiary of Tengelmann, to purchase seasonal merchandise to be sold in our stores. Our purchases from OBI International totaled $0.8 million in fiscal 2003. We own a jet aircraft, which Tengelmann leases under a full cost reimbursement lease. During fiscal 2003, 2002 and 2001, Tengelmann was obligated to and has reimbursed us $2.8 million, $2.8 million and $2.5 million, respectively, for their use of the aircraft. Note 19 - Environmental Liability We own a non-retail real estate location that was subjected to environmental contamination. We obtained an environmental remediation report to enable us to assess the potential environmental liability related to this property. Factors considered in determining the liability included, among others, whether we had been designated as a potentially responsible party, the number of potentially responsible parties designated at the site, the stage of the proceedings and the available environmental technology. During fiscal 2000, we assessed the likelihood that a loss had been incurred at this site as probable and based on findings included in remediation reports and discussion with legal counsel, estimated the potential loss to be $3.0 million on an undiscounted basis. Accordingly, such amount was accrued at that time. At each balance sheet date, we assess our exposure with respect to this environmental remediation based on current available information. Subsequently, during fiscal 2000, with respect to such review, we determined that additional costs amounting to $1.3 million would be incurred to remedy these environmental issues and, accordingly, this additional amount was accrued. During fiscal 2001, due to an unfavorable ruling by the local municipality, which was subsequently upheld by the New Jersey Superior Court, denying our proposed development plan, we determined that a decrease in the value of the property had occurred and recorded an additional charge of $2.0 million. The total liability, net of costs incurred to date, of $3.0 million was included in "Other non-current liabilities" in our Consolidated Balance Sheets at February 28, 2004. Note 20 - 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 fiscal 2003 results were not materially affected by the power outage. Note 21 - Summary of Quarterly Results (Unaudited) The following table summarizes our results of operations by quarter for fiscal 2003 and fiscal 2002. The first quarter of each fiscal year contains sixteen weeks, while the second and third quarters each contain twelve weeks. The fourth quarter of 2002 contains twelve weeks and the fourth quarter of 2003 contains thirteen weeks.
------------------------------------------------------------------------------------- First Second Third Fourth Total Quarter Quarter Quarter Quarter Year --------------- ---------------- --------------- ---------------- --------------- 2003 (unaudited) (Dollars in thousands, except per share amounts) - ---------------- Sales $3,203,830 $2,443,700 $2,465,295 $2,699,637 $10,812,462 Gross margin 879,169 658,926 656,061 735,660 2,929,816 Depreciation and amortization 84,096 61,596 63,383 58,080 267,155 Loss from operations (a) (d) (12,459) (20,913) (84,432) (50,685) (168,489) Interest expense (24,884) (17,945) (18,383) (20,602) (81,814) Loss from continuing operations (20,342) (57,095) (72,658) (61,252) (211,347) Income (loss) from discontinued operations 40,622 (26,595) 47,556 2,740 64,323 Net income (loss) (b) 20,280 (83,690) (25,102) (58,512) (147,024) Per share data: Loss from continuing operations - basic (c) (0.53) (1.48) (1.89) (1.59) (5.49) Income (loss) from discontinued operations - basic (c) 1.06 (0.69) 1.23 0.07 1.67 Net income (loss) - basic (c) 0.53 (2.17) (0.65) (1.52) (3.82) Loss from continuing operations - diluted (0.53) (1.48) (1.89) (1.59) (5.49) Income (loss) from discontinued operations - diluted 1.05 (0.69) 1.23 0.07 1.67 Net income (loss) - diluted 0.52 (2.17) (0.65) (1.52) (3.82) Market price: High 9.54 11.05 9.96 9.33 Low 4.08 7.92 5.02 7.15 Number of stores at end of period 667 643 645 633 Number of franchised stores served at end of period 64 64 63 63 - --------------------------------------------------------------------------------------------------------------------------- Such amounts are comprised of the following; item (b) is net of applicable income taxes: (a) Asset disposition initiative $ - $ 5,230 $ 124 $ (38,900) $ (33,546) Goodwill/long-lived asset impairment charge - - (60,082) - (60,082) All other losses from operations (12,459) (26,143) (24,474) (11,785) (74,861) --------- ---------- ---------- ---------- ---------- Loss from operations $(12,459) $ (20,913) $ (84,432) $ (50,685) $(168,489) ========= ========== ========= ========== ========== (b) Asset disposition initiative $ - $ 5,230 $ (224) $(38,542) $ (33,536) Goodwill/long-lived asset impairment charge - - (60,082) - (60,082) All other earnings (losses) 20,280 (88,920) 35,204 (19,970) (53,406) -------- ---------- --------- ---------- ---------- Net income (loss) $ 20,280 $ (83,690) $ (25,102) $ (58,512) $(147,024) ======== ========== ========= ========== ========= (c) The sum of quarterly basic income (loss) per share differs from full year amounts because the number of weighted average common shares outstanding has increased each quarter. (d) Loss from operations for the fourth quarter of fiscal 2003 includes a $17.5 million charge to increase our workers' compensation and general liability reserves in response to both adverse development of prior years' costs and other developments including a continuing trend of rising costs.
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------------- -------------- ------------- -------------- --------------- 2002 (unaudited) (Dollars in thousands, except per share amounts) - ---------------- Sales $3,093,776 $2,327,182 $2,310,775 $2,365,048 $10,096,781 Gross margin 881,815 659,332 643,952 660,360 2,845,459 Depreciation and amortization 72,551 58,740 58,016 60,763 250,070 Income (loss) from operations (a) (d) 25,214 (7,607) (11,280) (69) 6,258 Interest expense (26,752) (19,640) (19,816) (18,471) (84,679) Income (loss) from continuing operations 789 (147,261) (31,864) (22,818) (201,154) Income from discontinued operations 1,086 2,577 2,132 1,850 7,645 Net income (loss) (b) 1,875 (144,684) (29,732) (20,968) (193,509) Per share data: Income (loss) from continuing operations - basic and diluted (c) 0.02 (3.82) (0.83) (0.59) (5.23) Income (loss) from discontinued operations - basic and diluted (c) 0.03 0.06 0.06 0.05 0.20 Net income (loss) - basic and diluted (c) 0.05 (3.76) (0.77) (0.54) (5.03) Market price: High 28.44 20.00 10.85 8.25 Low 18.55 9.75 5.34 4.70 Number of stores at end of period 692 692 692 695 Number of franchised stores served at end of period 68 66 65 65 - -------------------------------------------------------------------------------------------------------------------------- Such amounts are comprised of the following; item (b) is net of applicable income taxes: (a) Asset disposition initiative $ (6,963) $ (1,303) $ 11,128 $ 3,532 $ 6,394 Gain on proceeds from insurance company demutualization 1,717 - - - 1,717 All other earnings (losses) from operations 30,460 (6,304) (22,408) (3,601) (1,853) -------- ------------ ---------- ----------- ----------- Income (loss) from operations $ 25,214 $ (7,607) $ (11,280) $ (69) $ 6,258 ======== ============ ========= ========== =========== (b) Asset disposition initiative $ (4,094) $ (776) $ 11,132 $ 3,331 $ 9,593 Gain on proceeds from insurance company demutualization 996 - - - 996 Deferred tax asset valuation allowance - (133,675) - - (133,675) All other earnings (losses) 4,973 (10,233) (40,864) (24,299) (70,423) -------- ------------ ---------- ---------- ----------- Net (loss) income $ 1,875 $ (144,684) $ (29,732) $ (20,968) $(193,509) ======== =========== ========= ========= ========== (c) The sum of quarterly basic income per share differs from full year amounts because the number of weighted average common shares outstanding has increased each quarter. (d) Income (loss) from operations for the fourth quarter of fiscal 2002 includes severance of approximately $10 million and a charge relating to the adoption of EITF 02-16 "Accounting By a Customer (including a Reseller) for Certain Consideration Received From a Vendor" of approximately $2 million. These charges are offset by a $7 million reduction of accruals for occupancy costs primarily related to a change in estimate.
Management's Report on Consolidated Financial Statements - -------------------------------------------------------- The Management of The Great Atlantic & Pacific Tea Company, Inc. has prepared the consolidated financial statements and related financial data contained in this Annual Report. The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America appropriate to the business and, by necessity and circumstance, include some amounts, which were determined using Management's best judgments and estimates with appropriate consideration to materiality. Management is responsible for the objectivity of the consolidated financial statements and other financial data included in this report. To meet this responsibility, Management maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that accounting records are reliable. Management supports a program of internal audits and internal accounting control reviews to provide reasonable assurance that the system is operating effectively. Within the 90-day period prior to the date of this report, we 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, we 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, 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. The Board of Directors pursues its responsibility for reported financial information through its Audit Committee. The Audit Committee meets periodically and, when appropriate, separately with Management, internal auditors and the independent accountants, PricewaterhouseCoopers LLP, to review each of their respective activities. Christian W. E. Haub Mitchell P. Goldstein Chairman of the Board, President Senior Vice President, and Chief Executive Officer Chief Financial Officer Report of Independent Auditors To the Stockholders and Board of Directors of The Great Atlantic & Pacific Tea Company, Inc: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and comprehensive (loss) income and cash flows present fairly, in all material respects, the financial position of The Great Atlantic & Pacific Tea Company, Inc. and its subsidiaries at February 28, 2004 and February 22, 2003, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Florham Park, New Jersey May 21, 2004 Five Year Summary of Selected Financial Data - --------------------------------------------
Fiscal 2003 Fiscal 2002 Fiscal 2001 Fiscal 2000 Fiscal 1999 (53 Weeks)(c) (52 Weeks)(c) (52 Weeks)(c) (52 Weeks)(c) (52 Weeks)(c) -------------- --------------- -------------- ---------------- ------------- (unaudited) (Dollars in thousands, except per share amounts) Operating Results Sales $10,812,462 $10,096,781 $10,206,246 $9,835,856 $9,367,964 (Loss) income from operations (a) (168,489) 6,258 (55,781) 47,925 141,601 Depreciation and amortization (267,155) (250,070) (247,381) (238,767) (215,768) Interest expense (81,814) (84,679) (91,722) (102,488) (90,445) (Loss) income from continuing operations (211,347) (201,154) (83,393) (30,001) 32,134 Income from discontinued operations 64,323 7,645 11,487 10,501 3,179 Net (loss) income (b) (147,024) (193,509) (71,906) (19,500) 35,313 Per Share Data (Loss) income from continuing operations - basic and diluted (5.49) (5.23) (2.17) (0.78) 0.84 Income from discontinued operations - basic and diluted 1.67 0.20 0.29 0.27 0.08 Net (loss) income - basic and diluted (3.82) (5.03) (1.88) (0.51) 0.92 Cash dividends - - - 0.30 0.40 Book value per share 10.02 12.93 17.54 19.53 20.65 Financial Position Current assets $1,146,312 $1,099,588 $1,212,074 $1,197,873 $1,218,717 Current liabilities 1,073,920 1,090,612 1,184,463 1,130,062 1,153,173 Working capital 72,392 8,976 27,611 67,811 65,544 Current ratio 1.07 1.01 1.02 1.06 1.06 Expenditures for property 134,677 219,530 246,182 415,842 479,572 Total assets 2,750,550 2,885,237 3,194,264 3,319,157 3,331,359 Current portion of long-term debt 2,271 25,820 526 6,195 2,382 Current portion of capital lease obligations 15,901 13,787 10,691 11,634 11,327 Long-term debt 823,738 803,277 779,440 915,321 865,675 Long-term portion of capital lease obligations 73,980 83,485 93,587 106,797 117,870 Total debt 915,890 926,369 884,244 1,039,947 997,254 Debt to total capitalization 70% 65% 57% 58% 56%
Five Year Summary of Selected Financial Data - Continued
Fiscal 2003 Fiscal 2002 Fiscal 2001 Fiscal 2000 Fiscal 1999 (53 Weeks)(c) (52 Weeks)(c) (52 Weeks)(c) (52 Weeks)(c) (52 Weeks)(c) -------------- --------------- -------------- ---------------- ------------- (unaudited) (Dollars in thousands, except per share amounts) Equity Stockholders' equity 385,824 498,191 672,988 748,811 792,138 Weighted average shares outstanding 38,516,750 38,494,812 38,350,616 38,347,216 38,330,379 Number of registered stockholders 5,469 5,751 6,087 6,281 6,890 Other Number of employees 74,185 78,710 78,995 83,000 80,900 New store openings 19 31 21 47 54 Number of stores at year end 633 695 702 752 750 Total store area (square feet) 24,724,168 26,817,650 26,664,312 27,931,729 26,904,331 Number of franchised stores served at year end 63 65 67 68 65 Total franchised store area (square feet) 2,048,016 2,066,401 2,108,969 2,021,206 1,908,271 Such amounts are comprised of the following; item (b) is net of applicable income taxes: (a) Asset disposition initiative $ (33,546) $ 6,394 $(193,468) $ - $ (59,886) Goodwill/long-lived asset impairment charge (60,082) - - - - Gain on proceeds from insurance company demutualization - 1,717 60,606 - - All other (losses) earnings from operations (74,861) (1,853) 77,081 47,925 201,487 ---------- ---------- --------- --------- --------- (Loss) income from operations $(168,489) $ 6,258 $ (55,781) $ 47,925 $ 141,601 ========== ========= ========== ========= ========= (b) Asset disposition initiative $ (33,536) $ 9,593 $(112,268) $ - $ (34,836) Goodwill/long-lived asset impairment charge (60,082) - - - - Gain on proceeds from insurance company demutualization - 996 35,151 - - Deferred tax asset valuation allowance - (133,675) - - - All other (losses) earnings (53,406) (70,423) 5,211 (19,500) 70,149 --------- ---------- --------- ---------- --------- Net (loss) income $(147,024) $(193,509) $ (71,906) $ (19,500) $ 35,313 ========= ========== ========== ========== ========= (c) Not derived from audited financial information.
Executive Officers - ------------------ Christian W. E. Haub Chairman of the Board, President and Chief Executive Officer Eric Claus President and Chief Executive Officer, A&P Canada Brian C. Piwek President and Chief Executive Officer, A&P U.S. William P. Costantini Senior Vice President, General Counsel and Secretary Mitchell P. Goldstein Senior Vice President, Chief Financial Officer John E. Metzger Senior Vice President, Chief Information Officer Board Of Directors - ------------------ Christian W. E. Haub (c)(d) Chairman of the Board, President and Chief Executive Officer John D. Barline, Esq. (b)(c)(f) Williams, Kastner & Gibbs LLP, Tacoma, Washington Jens-Jurgen Bockel (d) Chief Financial Officer and Member of the Managing Board Tengelmann Warenhandelsgesellschaft KG Muelheim, Germany Bobbie A. Gaunt (a)(b)(c)(e) Former President and CEO, Ford Motor Company of Canada Helga Haub (c)(d) Dan P. Kourkoumelis (a)(e)(f) Former President and CEO, Quality Food Centers, Inc. Edward Lewis (b)(d)(e) Chairman and Chief Executive Officer, Essence Communications Partners Richard L. Nolan (a)(c)(e)(f) Philip M. Condit Professor of Business Administration University of Washington Business School and William Barclay Harding Professor of Business Administration (Emeritus) Harvard University Maureen B. Tart-Bezer (a)(d)(e) Chief Financial Officer Virgin Mobile USA, LLC (a) Member of Audit Committee (Maureen B. Tart-Bezer, Chair) (b) Member of Compensation Committee (Bobbie A. Gaunt, Chair) (c) Member of Executive Committee (Christian W. E. Haub, Chair) (d) Member of Finance Committee (Edward Lewis, Chair) (e) Member of Governance Committee (Richard L. Nolan, Chair) (f) Member of IT Oversight Committee (Dan P. Kourkoumelis, Chair) Stockholder Information - ----------------------- Executive Offices Box 418 2 Paragon Drive Montvale, NJ 07645 Telephone 201-573-9700 Independent Accountants PricewaterhouseCoopers LLP 400 Campus Drive PO Box 988 Florham Park, NJ 07932 Stockholder Inquiries and Publications Stockholders, security analysts, members of the media and others interested in further information about our Company are invited to contact the Investor Relations Help Line at 201-571-4537. Internet users can access information on A&P at: www.aptea.com Correspondence concerning stockholder address changes or other stock account matters should be directed to our Company's Transfer Agent & Registrar American Stock Transfer and Trust Company 59 Maiden Lane New York, NY 10038 Telephone 800-937-5449 www.amstock.com Communications with the Board of Directors Stockholders who would like to contact the Company's Board of Directors, including a committee thereof or a specific Director, can send an e-mail to bdofdirectors@aptea.com or write to the following address: c/o The Great Atlantic & Pacific Tea Company, Inc., Office of the General Counsel, 2 Paragon Drive, Montvale, NJ 07645. Form 10-K Copies of Form 10-K filed with the Securities and Exchange Commission will be provided to stockholders upon written request to the Secretary at the Executive Offices in Montvale, New Jersey. Annual Meeting The Annual Meeting of Stockholders will be held at 9:00 a.m. (EDT) on Tuesday, July 13, 2004 at The Westin Southfield Detroit Hotel 1500 Town Center Southfield, Michigan, USA Common Stock Common stock of our Company is listed and traded on the New York Stock Exchange under the ticker symbol "GAP" and has unlisted trading privileges on the Boston, Midwest, Philadelphia, Cincinnati, and Pacific Stock Exchanges. The stock is generally reported in newspapers and periodical tables as "GtAtPc". (C) 2004 The Great Atlantic & Pacific Tea Co., Inc. All rights reserved. EX-14 3 b332049ex_14.txt CODE OF BUSINESS CONDUCT AND ETHICS Exhibit 14 CODE OF BUSINESS CONDUCT AND ETHICS THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. To my fellow directors, officers and employees: As our Company continues to move along into the third millennium, it is important that we work to maintain our reputation for quality, fairness and honesty. That reputation has been built over many years, and is one we believe must be preserved at all costs. We reinforced our commitment to our fine reputation by articulating and publishing our core values. Our core values reflect and guide the way we do business. Very simply, our core values include integrity, respect for all and the pursuit of excellence in everything we do. The ethical conduct of companies continues to receive great attention from the government, the press and the public. We must continue to conduct our business in an ethical manner and welcome such scrutiny. To assist you in this effort we have set down some guidelines in this Code of Business Conduct and Ethics. These guidelines apply to many of our everyday activities, including buying practices, record keeping, safety practices and the like. Our Company has a spirit that we like to call GAPtitude. GAPtitude signifies a respect for each other and an openness to all things that may concern our business. Adherence to our Code of Business Conduct and Ethics is intrinsic to GAPtitude. Fair and honest behavior is a matter of spirit and attitude, and no written code of conduct can anticipate every situation that may arise in a vigorous business environment. We need to put our core values into practice every day, and the best way to do that is through personal example and by reporting events, which are not in the spirit of our core values. Christian Haub Chief Executive Officer The Great Atlantic & Pacific Tea Company, Inc. TABLE OF CONTENTS Page GENERAL STATEMENT.............................................4 HOW TO REPORT YOUR CONCERNS...................................5 CONFLICTS OF INTEREST.........................................6 Financial & Business Interests.............................6 Investments................................................6 Corporate Opportunities....................................6 Protection and Proper Use of Company's Assets .............6 Company Loans .............................................6 Relationships with Suppliers...............................7 Fair Dealing...............................................7 Premiums and Prizes........................................7 Samples....................................................7 Gifts, Gratuities and Entertainment........................7 REPORTING, RELEASE OF INFORMATION AND CONFIDENTIALITY.........8 Record Keeping.............................................8 Public Company Reporting...................................8 Confidentiality............................................8 RELATIONSHIPS WITH OUTSIDE OFFICIALS..........................9 Political Contributions and Involvement....................9 Bribes and Undue Influence.................................9 COMPLIANCE WITH LAWS, RULES AND REGULATIONS...................9 Antitrust Laws.............................................9 Accounting Requirements....................................9 EEO and Discrimination Laws...............................10 Securities Laws...........................................10 Intellectual Property.....................................10 PROTECTING OUR ENVIRONMENT...................................11 SAFETY.......................................................11 AMENDMENT, MODIFICATION AND WAIVER...........................12 GENERAL STATEMENT The Great Atlantic & Pacific Tea Company, Inc. ("A&P") and its family of companies (collectively "the Company") is committed to integrity in the conduct of its business and requires that all directors, officers and employees (collectively, "representatives" and each, a "representative") perform their duties in a manner which is legally, ethically and morally unreproachable. Reflecting our core values, the Company's standards are high: simply complying with laws or following widespread business practices may be insufficient. It is therefore crucial that each director, officer and employee read and understand the information herein presented. It is the responsibility of each director, officer and employee of the Company to conduct himself or herself in a manner that will reflect our core values and support and maintain the Company's reputation. As representatives of the Company, it is essential that the actions of Company representatives comply with applicable legal requirements and ethical standards. It is likewise important that no actions taken by Company representatives appear to others to be inconsistent with that standard. In every case, each director, officer or employee should ask himself or herself if the conduct being contemplated would comply with our core values and with Company policies and would withstand public disclosure and scrutiny. By doing business in this manner, we can insure the respect of our customers, suppliers, stockholders, neighbors and government. This Code of Business Conduct and Ethics (the "Code of Conduct") describes certain ethical principles the Company has set for the conduct of its business, and outlines certain key legal requirements of which all Company representatives should be generally aware and with which all must comply. The principles set forth herein apply to all directors, officers and employees of the Company and are designed to deter wrongdoing and to promote honest and ethical conduct. Adherence to the principles set forth herein is a condition of employment. It is important to note that a violation of the Code of Conduct may, under certain circumstances, also constitute a criminal act. To assist directors, officers and employees in complying, more detailed policy statements are available on many of the topics addressed below. If there is uncertainty as to the applicability of any principle or policy to a particular situation or the propriety of any contemplated course of action, the Office of the General Counsel should be contacted (as noted below) for assistance and guidance. HOW TO REPORT YOUR CONCERNS The Company has established monitoring and auditing systems, which are designed to ensure compliance with applicable laws, rules, regulations and the Code of Conduct. The cooperation of each director, officer and employee is a key element to the successful administration of this Code of Conduct. It is the duty of each director, officer and employee to report any conduct which he or she believes violates applicable laws, rules, regulations or the Code of Conduct, including any transaction or relationship that reasonably could be expected to give rise to a conflict of interest. Company representatives are encouraged to talk to the Office of the General Counsel when in doubt about the best course of action in a particular situation. IF YOU HAVE INFORMATION OR CONCERNS ABOUT ANY ILLEGAL OR UNETHICAL CONDUCT OR ANY VIOLATION OF APPLICABLE LAWS, RULES, REGULATIONS OR THE CODE OF CONDUCT BY (a) ANY DIRECTOR, OFFICER OR EMPLOYEE OF THE COMPANY OR (b) ANY COMPANY SUPPLIER OR VENDOR OR ANY OTHER PERSON DOING BUSINESS WITH THE COMPANY, PLEASE PROMPTLY REPORT THE MATTER IN SUFFICIENT DETAIL TO PERMIT APPROPRIATE INVESTIGATION AND RESPONSE. IF YOU SUSPECT UNETHICAL, IMPROPER OR ILLEGAL CONDUCT OR PRACTICES, NOTABLY INVOLVING ACCOUNTING PRACTICES, INTERNAL ACCOUNTING CONTROLS OR FRAUD, YOU MUST PROMPTLY REPORT YOUR CONCERNS TO: * The Office of the General Counsel at (201) 571-4401 in Montvale, Headquarters; and/or * The Chief Internal Auditor of the Company at (201) 571-4148 in Montvale, Headquarters; and/or * The NETWORK HOT LINE AT 1-888-277-3258. Information received will be treated confidentially to the extent practicable and in no event will any retributive action be taken against any person who, in good faith, discloses information or reports a violation of applicable laws, rules, regulations or the Code of Conduct. CONFLICTS OF INTEREST Conflicts of interest are to be scrupulously avoided, and if unavoidable, must be disclosed at the earliest opportunity. A "conflict of interest" exists when an individual's private interests interfere or conflict in any way (or even appear to or could interfere or conflict) with the interests of the Company. A conflict situation can arise when a director, officer or employee takes actions or has interests that may make it difficult to perform his or her Company work objectively and effectively. Conflicts of interest also arise when a director, officer or employee, or member of his or her family, receives or could receive improper personal benefits as a result of his or her position in the Company and when a director, officer or employee is, or could reasonably appear to be, influenced, directly or indirectly, by personal considerations. If you have any uncertainty, contact the Office of the General Counsel for guidance. To prevent conflicts of interest: Financial & Business Interests. Directors, officers and employees of the Company may not (i) serve as officers, directors, associates or consultants of any company which either does business or wants to do business or competes or seeks to compete with the Company, (ii) compete with the Company when buying or selling property, (iii) work for another company if it is a customer or competitor of, or if it interferes with such representative's job(s) with, the Company, or (iv) maintain outside interests which materially interfere with the time and attention such director, officer or employee should devote to the Company. Investments. No director, officer or employee of the Company may invest in, own stock or other securities of, or have any other financial interest in, any organization doing business with the Company, unless the securities of such organization are listed on a public exchange, the representative's interests in the organization are less than 1% and the Company's purchases or services obtained from that organization are less than 5% of the organization's total sales. Corporate Opportunities. Directors, officers and employees are prohibited from (a) taking for themselves personally opportunities that are discovered through the use of corporate property, information or position, (b) using corporate property, information (whether or not confidential) or position for personal purposes or gain, and (c) competing with the Company. Protection and Proper Use of Company's Assets. All Company assets shall be used for legitimate business purposes. Theft, carelessness and waste have a direct impact on the Company's profitability. Every director, officer and employee shall protect the Company's assets and ensure their efficient use. Company Loans. The Company may not, directly or indirectly, extend or maintain credit, arrange for the extension of credit or renew an extension of credit, in the form of a personal loan, to or for any director or executive officer. Loans to directors or executive officers in furtherance of the business of the Company are not prohibited but must have the prior approval of the Office of the General Counsel. Relationships with Suppliers. The Company encourages good supplier relations. However, Company representatives may not benefit personally, whether directly or indirectly, from any purchase of goods or services for or from the Company. Individuals whose responsibilities include purchasing (be it merchandise, fixtures, services, real estate or other), or who have contact with suppliers, must not exploit their position for personal gain. Under no circumstances may any Company representative receive cash or cash equivalents from any supplier whether directly or indirectly. Fair Dealing. Each director, officer and employee should endeavor to deal fairly with the Company's customers, suppliers, competitors and employees. Premiums and Prizes. Premiums and prizes are occasionally offered by manufacturers for the sale or purchase of certain quantities of merchandise. The Company's buying program is not to be influenced by any premium, prize or cash award to the buyer. Merchandise is to be purchased only when needed to replenish inventory or when an impartial business decision has been made to purchase a new item. The Company and its directors, officers and employees must not participate in contests in which merchandise or other awards, such as trips, are given to Company representatives by suppliers. In these instances, the Company will attempt to obtain cash for its account or the merchandise, etc., as premiums to be used at the discretion of the Company. In the event a vendor refuses to reimburse the Company in place of the individual representative, the matter should be turned over to the Senior Merchandising Officer. Through the vendor's national headquarters, Company management will endeavor to resolve the matter to the Company's benefit. In the event a supplier or vendor seeks to avoid or circumvent Company policy in this regard, the Company's policy should be firmly communicated to the relevant supplier or vendor and the matter reported to the Senior Merchandising Officer. Samples. It is accepted business practice for vendors to distribute samples to potential purchasers. Company policy is that, to the extent necessary to make a reasoned appraisal of products, samples of such products may be accepted in quantities and by Company representatives as necessary to the business purpose. Gifts, Gratuities and Entertainment. Gifts of no more than nominal value are to be accepted by any Company representative or member of his/her family from existing sources, prospective sources or persons, firms or corporations with whom the Company does or might do business. Gifts and entertainment that are acceptable are only those that reflect common courtesies and responsible business practice. Gifts and entertainment that give the appearance that the individual's business judgment could be affected must be avoided and refused. We must always act in a way that reflects our core values and will withstand close scrutiny by anyone. REPORTING, RELEASE OF INFORMATION AND CONFIDENTIALITY Record Keeping. All record keeping and reporting of information must be accurate, complete, honest and timely. The knowing or deliberate falsification of any documents or data will be the basis for immediate discharge and may subject such director, officer or employee to civil and criminal sanctions as well. Public Company Reporting. Dishonest reporting of information to organizations and people inside or outside the Company, including false or artificial entries in books and records, is strictly prohibited. It could lead to civil or criminal liability for the applicable director, officer or employee of the Company and for the Company itself. This includes not on1y inaccurate reporting but also organizing or reporting information in a way that is intended to mislead or misinform. Established Company procedures for the release of information about the Company must be followed strictly. In personal as well as business conversation, Company representatives should limit comments about the Company to information that has been publicly disclosed by the Company in accordance with Company procedures. Confidentiality. Information is key to our Company's success. Every director, officer and employee must protect and maintain the confidentiality of information that is confidential, while working at the Company and after leaving the Company. Confidential information includes all information entrusted to directors, officers and employees by the Company or its customers or suppliers, except when disclosure is authorized or legally mandated, and all non-public information that might be of use to competitors, or harmful to the Company or its customers or suppliers, if disclosed. More specifically, confidential information includes, but is not limited to, financial documents, earnings estimates, pending sales or acquisitions, pricing or vendor information, plans for future store locations, corporate developments, the cost of goods, personnel files, manuals and procedures, computer software, design documents, videos, memos and all other significant business information or developments. Information which has been made public by the Company, such as by press release, advertisement or publicly filed documents, is not considered confidential information. If a director, officer or employee is unsure whether certain information is confidential, presume that it is. Therefore, it is important to be careful about what is said to friends, business associates and family members, even spouses. Finally, no representative of the Company should attempt to obtain confidential information which does not relate to his or her employment duties and responsibilities. RELATIONSHIPS WITH OUTSIDE OFFICIALS When dealing with public, union or other outside officials, directors, officers and employees must avoid any activity which is, or is likely to be perceived as, illegal or unethical, or which reflects a favoritism not accorded to all. The appearance of impropriety may be as damaging to our Company as an actual misdeed. Company representatives must exercise caution to prevent relationships and dealings with public, union or other outside officials from becoming subject to question. Political Contributions and Involvement. Company representatives are encouraged to vote and participate fully in the political process. Such participation shall be entirely personal. The Company, from time to time, may approve the establishment of a political action committee (PAC) filed and operated under the laws and rules of the U.S. Federal Election Commission or the appropriate governmental entity. Participation by Company personnel representatives in any PAC is entirely voluntary, and any coercion to contribute is prohibited. Bribes and Undue Influence. Company policy prohibits offering bribes, payments or gifts in any form, directly or indirectly, to any public, union or other outside official, government employee or union official. COMPLIANCE WITH LAWS, RULES AND REGULATIONS Strict compliance with all laws, rules and regulations affecting the conduct of the Company's business is required. Any questions as to the applicability of any law, legal requirement or the appropriate manner of compliance should be directed to the Office of the General Counsel. (See How to Report Your Concerns). Antitrust Laws. All directors, officers and employees must comply with state and federal antitrust laws. The broad purpose of antitrust laws is to promote fair and honest competition. Antitrust laws prohibit anti-competitive behavior such as price-fixing, agreements or understandings among competitors, and discriminatory pricing. Accounting Requirements. The Company follows the accepted accounting rules and controls as set forth by the Securities and Exchange Commission and the Financial Accounting Standards Board. All account books, budgets, project evaluations, expense accounts and other papers utilized in maintaining business records of the Company must accurately reflect the matters to which they relate. All assets of the Company must be carefully and properly accounted for. No payment of funds of the Company shall be approved or made with the understanding that any part of the funds will be used in a manner contrary to this principle. The Company's certified public accountants should be given access to all information necessary for them to conduct audits properly. EEO and Discrimination Laws. The Company requires strict adherence to its policies and the laws regarding Equal Employment Opportunity and discrimination in the workplace. Severe penalties may be imposed for violation. All forms of unlawful harassment are similarly prohibited, including harassment by vendors or contractors. The term "harassment" includes sexual, racial, ethnic and other forms of harassment, including, harassment based upon a disability. Specific Company policies, which are available on the Company's Intranet and on GAPCOM, set forth the means through which directors, officers and employees who have witnessed or experienced harassment may report it and seek appropriate relief. Securities Laws. It is the policy of the Company to comply with all applicable securities laws, including insider trading laws. No director, officer or employee may disclose "insider" information (i.e., material, non-public information acquired about the Company) to any outside person or to other Company representatives except on a strict need-to-learn basis, and no director, officer or employee may take any economic or personal advantage of insider information, such as buying or selling stock or other securities of the Company or of any other company to which the insider information pertains. In addition, directors, officers and other employees of the Company may not at any time sell Company securities short or buy or sell "derivatives", such as options, stock appreciation rights, exchange traded options, put and calls or other securities that relate to or derive their value from the Company's securities. Intellectual Property. The Company's intellectual property is a very valuable asset. Intellectual property includes Company trademarks and service marks, copyright or copyrightable materials, patents and trade secrets. Intellectual property rights of the Company, as well as those of others, must be respected. It is vital that these are protected and any infringements reported to the Office of the General Counsel. The Company owns all inventions, discoveries, ideas, concepts, written material and trade secrets, which are created during employment or are produced at the Company's direction or using Company time or materials. Everyone is urged to cooperate in documenting Company ownership of all intellectual property. PROTECTING OUR ENVIRONMENT Our Company is committed to protecting and improving the environment in all areas of its operations, thereby preserving and enhancing the quality of life of our representatives, customers and neighbors. This commitment is a responsibility shared with all by all directors, officers and employees. SAFETY The Company strives and is committed to provide healthy and safe workplace environments. The U.S. Occupational Safety and Health Act regulates both physical safety and exposure to conditions in the workplace that could harm employees. The place of employment is to be free of recognized hazards that might cause injury or death as well as be in compliance with applicable federal, state or provincial safety and health standards. All representatives of the Company have the responsibility to carry on their duties in a safe and efficient manner. Safety consciousness must be a key part of each representative's thinking and planning. Company representatives must report any unsafe conditions immediately. AMENDMENT, MODIFICATION AND WAIVER Any amendment or modification of this Code of Conduct must be in writing and approved by the Governance Committee of the Board of Directors. Any waiver of this Code of Conduct for non-executive officers or employees may be granted by the Office of the General Counsel. Any waiver of this Code of Conduct for directors or executive officers may be granted only by the Governance Committee of the Board of Directors, subject to the disclosure and other provisions of the Securities Exchange Act of 1934, the rules promulgated thereunder and the applicable rules of the New York Stock Exchange. - ------------------------------------------------------------------------------- This booklet describes broadly the ethical standards by which we conduct our business. If there is any uncertainty as to the applicability of any of these standards to a particular situation or the propriety of any contemplated course of action, the Office of the General Counsel in Montvale, NJ should be contacted for assistance and guidance. If you have information or concerns about any illegal or unethical conduct, promptly make a report to the Office of the General Counsel at (201) 571-4401, the Chief Internal Auditor at (201) 571-4148 or the NETWORK HOTLINE at 1-888-277-3258. - ------------------------------------------------------------------------------- EX-21 4 b332049ex_21.txt LIST OF SUBSIDIARIES Exhibit 21 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. AND SUBSIDIARIES State of Incorporation - Maryland Date of Incorporation - May 29, 1925 Name Changed - July 30, 1958 The Stock of all subsidiaries is 100% owned or controlled by the parent company except as denoted below and in the case of a few subsidiaries where nominal qualifying shares are held in the names of subsidiary officers and/or directors in trust. No shares of any subsidiary's stock are subject to options. COMPANIES STATE INCORPORATED - --------- ------------------ A&P Wine and Spirits, Inc. Massachusetts ANP Properties I Corp. Delaware ANP Sales Corp. Maryland APW Produce Company, Inc. New York APW Supermarket Corporation Delaware APW Supermarkets, Inc. New York Big Star, Inc. Georgia The Great Atlantic and Pacific Tea Company, Limited (NRO) Canada The Great Atlantic & Pacific Company of Canada, Limited d/b/a A&P and New Dominion Canada A&P Drug Mart Limited Ontario A&P Properties Limited Ontario 3399486 Canada Inc. Canada G. A. Love Foods Inc. Ontario Love's York Properties Inc. Ontario 1282891 Ontario Inc. 3328155 Canada Inc. New Dominion Stores (1986), Inc. 3467210 Canada Inc. 3499031 Canada Inc. 3557588 Canada Inc. 3714683 Canada Inc. 3864715 Canada Inc. Borman's, Inc. d/b/a Farmer Jack Delaware Compass Foods, Inc. Delaware Family Center, Inc. d/b/a Family Mart Delaware Food Basics, Inc. Delaware Futurestore Food Markets, Inc. Delaware Gerard Avenue, Inc. Delaware The Great Atlantic & Pacific Tea Company of Vermont, Inc. Vermont Hamilton Property I, Inc. Delaware Hopelawn Property I, Inc. Delaware Kohl's Food Stores, Inc. Wisconsin Kwik Save Inc. Pennsylvania Limited Foods, Inc. Delaware LO-LO Discount Stores, Inc. Texas Montvale Holdings, Inc. New Jersey Richmond, Incorporated d/b/a Pantry Pride & Sun, Inc. Delaware St. Pancras Too, Limited Bermuda Shopwell, Inc. d/b/a Food Emporium Delaware Southern Acquisition Corporation Delaware Southern Development, Inc. of Delaware Delaware Super Fresh Food Markets, Inc. Delaware Super Fresh Food Markets of Maryland, Inc. Maryland Super Fresh/Sav-A-Center, Inc. Delaware Super Fresh Food Markets of Virginia, Inc. Delaware Super Market Service Corp. Pennsylvania Super Plus Food Warehouse, Inc. Delaware Supermarket Distribution Service Corp. New Jersey Supermarket Distribution Service - Florence, Inc. New Jersey Supermarket Distribution Services, Inc. Delaware Supermarket Systems, Inc. Delaware Tea Development Co., Inc. Delaware The South Dakota Great Atlantic & Pacific Tea Company, Inc. South Dakota Transco Service-Milwaukee, Inc. New Jersey Waldbaum, Inc. d/b/a Waldbaum, Inc. and Food Mart New York W.S.L. Corporation New Jersey 2008 Broadway, Inc. New York EX-23 5 b332049ex_23.txt CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement No. 2-92428 on Form S-8, Post Effective Amendment No. 7 to Registration Statement No. 2-59290 on Form S-8 and Post Effective Amendment No. 3 to Registration Statement No. 2-73205 on Form S-8 of The Great Atlantic & Pacific Tea Company, Inc. of our report dated May 21, 2004, relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP Florham Park, NJ May 21, 2004 EX-31.1 6 b332049ex_31-1.txt CERTIFICATION BY CEO Exhibit 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER Section 302 Certification I, Christian W.E. Haub, certify that: 1. I have reviewed this annual report on Form 10-K of The Great Atlantic & Pacific Tea Company, Inc.; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) disclosed in this annual 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: May 21, 2004 - ------------------------ Christian W. E. Haub Chairman of the Board, President and Chief Executive Officer EX-31.2 7 b332049ex_31-2.txt CERTIFICATION BY CFO Exhibit 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Section 302 Certification I, Mitchell P. Goldstein, certify that: 1. I have reviewed this annual report on Form 10-K of The Great Atlantic & Pacific Tea Company, Inc.; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) disclosed in this annual 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: May 21, 2004 - ------------------------- Mitchell P. Goldstein Senior Vice President, Chief Financial Officer EX-32 8 b332049ex_32.txt CERTIFICATIONS PURSUANT TO SARBANES-OXLEY ACT 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 Annual Report of the Company on Form 10-K for the period ended February 28, 2004 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: May 21, 2004 /s/ Christian W. E. Haub ------------------------ Christian W. E. Haub Chairman of the Board, President and Chief Executive Officer Dated: May 21, 2004 /s/ Mitchell P. Goldstein ------------------------- Mitchell P. Goldstein Senior Vice President, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----