Executed Copy
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 10, 1994 Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
----------------------------------------------
(Exact name of registrant as specified in charter)
Maryland 13-1890974
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(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) (Zip Code)
Registrant's telephone number, including area code 201-573-9700
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- - -------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
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 XXX NO
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 10, 1994
----- ---------------------------------
Common stock - $1 par value 38,220,333 shares
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF CONSOLIDATED OPERATIONS & RETAINED EARNINGS
(Dollars in thousands, except per share figures)
(Unaudited)
12 Weeks Ended 28 Weeks Ended
September 10, September 11, September 10, September 11,
1994 1993 1994 1993
----------- ----------- ----------- -----------
Sales $2,390,914 $2,399,368 $5,616,273 $5,678,632
Cost of merchandise sold (1,710,003) (1,708,875) (4,022,718) (4,046,985)
---------- ---------- ---------- ----------
Gross margin 680,911 690,493 1,593,555 1,631,647
Store operating, general and
administrative expense (655,043) (666,715) (1,535,909) (1,559,864)
---------- ---------- ---------- ----------
Income from operations 25,868 23,778 57,646 71,783
Interest expense (16,418) (14,371) (36,894) (33,476)
---------- ---------- ---------- ----------
Income before income
taxes and cumulative effect 9,450 9,407 20,752 38,307
Provision for income taxes (3,393) (3,450) (7,450) (15,300)
---------- ---------- ---------- ----------
Income before cumulative
effect 6,057 5,957 13,302 23,007
Cumulative effect on prior years of
change in accounting principle-
Postemployment benefits - - (4,950) -
---------- ---------- ---------- ----------
Net income 6,057 5,957 8,352 23,007
Retained earnings at
beginning of period 523,830 565,202 529,179 555,796
Cash dividends (7,644) (7,644) (15,288) (15,288)
---------- ---------- ---------- ----------
Retained earnings at
end of period $ 522,243 $ 563,515 $ 522,243 $ 563,515
========== ========== ========== ==========
Earnings per share:
Income before
cumulative effect $ .16 $ .15 $ .35 $ .60
Cumulative effect on prior years of
change in accounting principle-
Postemployment benefits - - (.13) -
---------- ---------- ---------- ----------
Net income $ .16 $ .15 $ .22 $ .60
========== ========== ========== ==========
Cash dividends $ .20 $ .20 $ .40 $ .40
========== ========== ========== ==========
Weighted average number of
shares outstanding 38,220,000 38,220,000 38,220,000 38,220,000
========== ========== ========== ==========
See Notes to Quarterly Report on Page 5.
- 1 -
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
September 10, 1994 February 26, 1994
------------------ ------------------
(Unaudited)
ASSETS
- - ------
Current assets:
Cash and short-term investments $ 132,683 $ 124,236
Accounts receivable 197,616 190,954
Inventories 849,769 850,077
Prepaid expenses and other assets 63,869 65,072
---------- ----------
Total current assets 1,243,937 1,230,339
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Property:
Property owned 1,553,270 1,564,745
Property leased 114,728 122,788
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Property-net 1,667,998 1,687,533
Other assets 177,540 180,823
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Total Assets $3,089,475 $3,098,695
========== ==========
See Notes to Quarterly Report on Page 5.
-2-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
September 10, 1994 February 26, 1994
------------------ ------------------
(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
- - ----------------------------------
Current liabilities:
Current portion of long-term debt $ 56,746 $ 77,755
Current portion of obligations under
capital leases 15,277 16,097
Accounts payable 468,352 458,875
Book overdrafts 167,947 196,818
Accrued salaries, wages and benefits 148,936 173,366
Accrued taxes 38,882 35,879
Other accruals 165,293 192,342
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Total current liabilities 1,061,433 1,151,132
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Long-term debt 662,340 544,399
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Obligations under capital leases 154,206 162,866
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Deferred income taxes 89,009 100,405
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Other non-current liabilities 137,516 145,476
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Shareholders' equity:
Preferred stock--no par value;
authorized--3,000,000 shares;
issued--none - -
Common stock--$1 par value; authorized--
80,000,000 shares;
issued--38,229,490 shares 38,229 38,229
Capital surplus 453,475 453,475
Cumulative translation adjustment (28,613) (26,103)
Retained earnings 522,243 529,179
Treasury stock, at cost, 9,157 shares (363) (363)
---------- ----------
Total shareholders' equity 984,971 994,417
---------- ----------
Total liabilities and shareholders'
equity $3,089,475 $3,098,695
========== ==========
See Notes to Quarterly Report on Page 5.
-3-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
28 Weeks Ended
September 10, September 11,
1994 1993
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,352 $ 23,007
Adjustments to reconcile net income
to cash provided by operating activities:
Cumulative effect on prior years of change
in accounting principle:
Postemployment benefits 4,950 -
Depreciation and amortization 132,082 129,503
Deferred income tax provision
on income before cumulative effect 6,511 1,837
(Gain) loss on disposal of owned property (1,815) 1,589
Increase in receivables (6,894) (4,741)
(Increase)decrease in inventories (1,509) 13,835
Increase in other current assets (11,851) (11,810)
Increase in accounts payable 10,166 27,765
Increase (decrease) in accrued salaries,
wages and benefits (23,397) 3,475
Increase in accrued taxes 2,608 13,417
Decrease in store closing reserves (9,128) (22,069)
Decrease in acquisition reserves (13,901) (10,787)
Decrease in insurance reserves (17,371) (12,363)
Other (2,420) 5,579
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Net cash provided by operating activities 76,383 158,237
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (117,009) (138,139)
Proceeds from disposal of property 6,253 7,584
Acquisition of business, net of
cash acquired - (42,948)
--------- ---------
Net cash used in investing activities (110,756) (173,503)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 98,651 77,294
Payment of long-term debt (3,579) (2,999)
Decrease in book overdrafts (28,108) (22,461)
Principal payments on capital leases (8,468) (9,629)
Cash dividends (15,288) (15,288)
Purchase of treasury stock - (2)
--------- ---------
Net cash provided by financing
activities 43,208 26,915
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Effect of exchange rate changes on
cash and short-term investments (388) (1,313)
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NET INCREASE IN CASH AND
SHORT-TERM INVESTMENTS 8,447 10,336
Cash and Short-Term Investments
at Beginning of Period 124,236 110,120
--------- ---------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 132,683 $ 120,456
========= =========
See Notes to Quarterly Report on Page 5.
-4-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO QUARTERLY REPORT
-------------------------
1) BASIS OF PRESENTATION
The consolidated financial statements for the 28 weeks ended September
10, 1994 and September 11, 1993 are unaudited, and in the opinion of
management, all adjustments necessary for a fair presentation of such
financial statements have been included. Such adjustments consisted only
of normal recurring items, except for the cumulative effect adjustment
associated with the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 112 "Employers' Accounting for Postemployment
Benefits". Interim results are not necessarily indicative of results for
a full year.
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries.
This Form 10-Q should be read in conjunction with the Company's
consolidated financial statements and notes incorporated by reference in
the 1993 Annual Report on Form 10-K.
Certain reclassifications have been made to the prior interim periods'
financial statements in order to conform to the current period
presentation.
2) ACCOUNTING CHANGE
Effective February 27, 1994, the Company adopted SFAS No. 112 "Employers'
Accounting for Postemployment Benefits". SFAS No. 112 requires the
accrual of costs for preretirement, postemployment benefits provided to
former or inactive employees and the recognition of an obligation for
these benefits.
The Company's previous accounting policy had been to accrue for workers'
compensation and a principal portion of long-term disability benefits and
to expense other postemployment benefits, such as short-term disability,
as incurred. As a result, the Company recorded a charge of $5.0 million,
net of applicable income taxes of $3.9 million, as the cumulative effect
of recording the obligation as of the beginning of the year. The effect
of adopting the Statement will have an immaterial effect on the financial
results before the cumulative effect of accounting change for the fiscal
year.
3) CONTINGENCY
During the second quarter of fiscal 1994, the Company entered into
certain labor agreements in Canada which allow the union employees the
option of participating in a termination/reassignment program affecting
current A&P store employees. While the cost of the program could be
substantial, until implementation occurs or is at least substantially
underway (which is anticipated to be by the end of the Company's third
quarter) no reasonably accurate estimate of the cost of this program can
be determined.
-5-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
12 WEEKS ENDED SEPTEMBER 10, 1994
---------------------------------
OPERATING RESULTS
Sales for the second quarter ended September 10, 1994 of $2.4 billion
decreased $8 million or 0.4% from last year. A lower Canadian exchange rate
adversely affected sales by $26 million or 1.1%. Excluding the effect of
the change in exchange rates, sales increased 0.7%. Contributing to this
increase were the opening of 8 new stores during the first two quarters of
fiscal 1994. New store openings since the beginning of fiscal 1993 added
approximately 3.1% to sales in the second quarter of fiscal 1994. The
Company, in its continuing program to eliminate unproductive stores, closed
58 stores during the first two quarters of fiscal 1994. The closure of
stores since the beginning of fiscal 1993 reduced comparative sales by 3.3%.
Same store sales for the second quarter were 0.7% ahead of prior year.
Average weekly sales per store were approximately $174,700 versus $165,200
for the corresponding period of the prior year for a 5.8% increase.
Second quarter sales for U.S. operations have improved, with same store
sales up 2.6% and comparable store sales, which include replacement stores,
up 3.4% over the prior year. In Canada, same store sales declined 7.0%,
largely reflecting the slow return of sales for the Miracle Food Mart stores
since the settlement of a 14-week labor strike in 70 Miracle Food Mart
stores which ended February 25, 1994.
Gross margin as a percent of sales decreased 0.3% to 28.5% in the second
quarter of 1994 from 28.8% for the second quarter of the prior year
resulting primarily from increased special price reductions partly offset by
increased margins in the U.S.. The gross margin dollar decrease of $10
million is a result of a lower Canadian exchange rate ($7 million) and a
decrease in gross margin rates of $8 million, partly offset by an increase
in volume of $5 million. The U.S. gross margin increased $18 million
principally as a result of increased volume of $15 million. In Canada,
gross margin declined $28 million, consisting of volume declines of $11
million, a decrease in gross margin rates of $10 million and the exchange
rate decline of $7 million.
Store operating, general and administrative expense as a percent of sales
decreased to 27.4% from 27.8% for the corresponding period in the prior year
resulting primarily from reduced labor costs and decreased general liability
and workmen's compensation costs, principally in the U.S., partly offset by
increased advertising and store occupancy costs.
Interest expense increased from the previous year primarily due to increased
U.S. borrowings of $100 million in Long-term Notes and an increase in
interest rates on short-term borrowings partly offset by a decrease in the
interest rate on Long-term Notes.
-6-
Income before income taxes for the second quarter ended September 10, 1994
is $9.5 million compared to $9.4 million for the comparable period in the
prior year. As a result of the Canadian sales decline mentioned above, the
Company has not been able to fully realize the benefits of the labor
settlement. The Company continues to believe that the benefits of the
promotional programs and the labor settlement will have a positive impact on
the future Canadian operating results. The future profitability of the
Canadian business has a direct impact on the Company's ability to recover
the goodwill associated with such operations and realize deferred tax assets
previously recorded. The Company continues to evaluate the recoverability
of the goodwill associated with its Canadian operations and the likelihood
of realizing its deferred tax assets.
The income tax provision recorded in the second quarter of fiscal years 1994
and 1993 reflects the Company's estimated expected annual tax rates applied
to their respective domestic and foreign financial results.
MANAGEMENT'S DISCUSSION AND ANALYSIS
28 WEEKS ENDED SEPTEMBER 10, 1994
-------------------------------------
OPERATING RESULTS
Sales for the 28 weeks ended September 10, 1994 of $5.6 billion decreased
$62 million or 1.1% from last year. A lower Canadian exchange rate
adversely affected sales by $77 million or 1.4%. In addition, a
competitors' strike in the New York metropolitan market last year resulted
in an estimated current year comparable sales decline of 0.5%. Excluding
the effects of the change in exchange rates and the effect of last year's
competitors' strike, sales increased 0.8%. New store openings since the
beginning of fiscal 1993 and the acquisition of Big Star stores in the prior
year first quarter added approximately 3.3% to sales in the first two
quarters of fiscal 1994. The closure of stores since the beginning of
fiscal 1993 reduced comparative sales by approximately 2.7%. Same store
sales for the first 28 weeks of fiscal 1994 increased 0.1% over prior year.
Average weekly sales per store were approximately $173,700 versus $166,900
for the same period of the prior year for a 4.1% increase.
Same store sales for U.S. operations were 1.7% ahead of prior year, after
excluding the effect of last year's competitors' strike. Canadian same
store sales were down 6.2% mainly due to the slow recovery of sales for the
Miracle Food Mart stores since the settlement of the Canadian labor strike
on the last day of fiscal 1993.
Gross margin as a percent of sales decreased 0.3% to 28.4% for the current
year from 28.7% for the prior year resulting primarily from increased
special price reductions partly offset by increased buying allowances in the
U.S.. The gross margin dollar decrease of $38 million is a result of the
decline in the Canadian exchange rate of $20 million and a decrease in gross
margin rates of $22 million, principally Canadian, partly offset by an
increase in volume of $4 million. The U.S. gross margin increased $35
million of which $25 million is attributable to volume increases. In
Canada, gross margin decreased $73 million, consisting of a decrease in
gross margin rates of $31 million, a volume decline of $22 million and the
exchange rate decline of $20 million.
-7-
Store operating, general and administrative expense as a percent of sales
decreased to 27.3% from 27.5% for the prior year primarily resulting from
decreased store labor partly offset by increased advertising and store
occupancy costs.
Interest expense increased from the previous year mainly as a result of
increased US. borrowings of $100 million in Long-term Notes and an increase
in interest rates on short-term borrowings partly offset by a decrease in
the interest rate on Long-term Notes.
Income before income taxes and cumulative effect for the 28 weeks ended
September 10, 1994 is $20.8 million compared to $38.3 million for the same
period of the prior year. As a result of the Canadian sales decline
mentioned above, the Company has not been able to fully realize the benefits
of the labor settlement. The Company continues to believe that the benefits
of the promotional programs and the labor settlement will have a positive
impact on the future Canadian operating results. The future profitability
of the Canadian business has a direct impact on the Company's ability to
recover the goodwill associated with such operations and realize deferred
tax assets previously recorded. The Company continues to evaluate the
recoverability of the goodwill associated with its Canadian operations and
the likelihood of realizing its deferred tax assets.
The income tax provision for the first 28 weeks of fiscal years 1994 and
1993 reflects the Company's estimated expected annual tax rates applied to
their respective domestic and foreign financial results.
Effective February 27, 1994, the Company adopted SFAS No. 112 "Employers'
Accounting for Postemployment Benefits". As a result, the Company recorded
a charge of $5.0 million or $0.13 per share (net of tax) as the cumulative
effect of this change on prior years.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the second quarter with working capital of $183 million
compared to $79 million at the beginning of the fiscal year. The Company
had cash and short-term investments aggregating $133 million at the end of
the second quarter of fiscal 1994 compared to $124 million at the end of
fiscal 1993. The Company has in excess of $300 million in various available
credit facilities.
These available cash resources, together with income from operations, are
sufficient for the Company's capital expenditure program, mandatory
scheduled debt repayments and dividend payments for fiscal 1994.
For fiscal 1994, the Company had planned capital expenditures of
approximately $340 million for 35 new stores and approximately 120 remodels
and expansions. Certain store openings and remodels and expansions have
been delayed mainly to permit compliance with applicable regulatory
requirements. Accordingly, the Company has adjusted its planned 1994
capital expenditures to approximately $250 million including 20 new stores
and approximately 75 remodels and expansions. For the 28 weeks ended
September 10, 1994, capital expenditures totaled $117 million, which
included 8 new stores and 33 remodels and enlargements.
-8-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At its Annual Meeting of Shareholders, held July 12, 1994, its
proposals for the 1994 Stock Option Plan and the 1994 Stock Option
Plan for Non-Employee Directors were approved, with 33,778,996
affirmative votes and 833,290 negative votes cast on the former,
and 33,551,403 affirmative votes and 1,025,179 negative votes cast
on the latter.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
-9-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
Date: October 24, 1994 By: /s/ Kenneth A. Uhl
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
-10-
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