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 December 4, 1993 Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
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(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
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(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
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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 Dec. 4, 1993
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Common stock - $1 par value 38,220,333 shares
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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 40 Weeks Ended
Dec. 4, Dec. 5, Dec. 4, Dec. 5,
1993 1992 1993 1992
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Sales $2,342,935 $2,375,809 $8,021,567 $8,123,885
Cost of merchandise sold (1,677,356) (1,708,036) (5,724,341) (5,811,699)
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Gross margin 665,579 667,773 2,297,226 2,312,186
Store operating, general and
administrative expense (652,193) (657,248) (2,212,057) (2,213,755)
---------- ---------- ---------- ----------
Income from operations 13,386 10,525 85,169 98,431
Interest expense (12,754) (14,903) (46,230) (50,264)
Provision for potential loss
on Isosceles investment - - - (151,238)
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Income (loss) before income
taxes and cumulative effect 632 (4,378) 38,939 (103,071)
Benefit (provision) for
income taxes (253) 4,800 (15,553) 44,700
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Income (loss) before
cumulative effect 379 422 23,386 (58,371)
Cum. effect on prior years of
changes in acctg. principles
Income taxes - - - (64,500)
Postretirement benefits - - - (26,500)
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Net income (loss) 379 422 23,386 (149,371)
Retained earnings at
beginning of period 563,515 610,792 555,796 775,873
Cash dividends (7,644) (7,644) (22,932) (22,932)
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Retained earnings at
end of period $ 556,250 $ 603,570 $ 556,250 $ 603,570
========== ========== ========== ==========
Earnings (loss) per share:
Income (loss) before
cumulative effect $ .01 $ .01 $ .61 $ (1.53)
Cum. effect on prior years of
changes in acctg. principles
Income taxes - - - (1.69)
Postretirement benefits - - - (.69)
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Net income (loss) $ .01 $ .01 $ .61 $ (3.91)
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Cash dividends $ .20 $ .20 $ .60 $ .60
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Weighted average number of
shares outstanding 38,220,000 38,220,000 38,220,000 38,219,000
========== ========== ========== ==========
See Notes to Quarterly Report on Pages 5 and 6.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
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(Dollars in thousands)
Dec. 4, 1993 Feb. 27, 1993
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(Unaudited)
ASSETS
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Current assets:
Cash and short-term investments $ 129,332 $ 110,120
Accounts receivable 200,744 194,557
Inventories 881,138 856,319
Prepaid expenses and other assets 67,846 60,496
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Total current assets 1,279,060 1,221,492
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Property:
Property owned 1,599,578 1,562,805
Property leased 126,030 141,339
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Property-net 1,725,608 1,704,144
Other assets 166,321 165,294
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Total Assets $3,170,989 $3,090,930
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See Notes to Quarterly Report on Pages 5 and 6.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
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(Dollars in thousands)
Dec. 4, 1993 Feb. 27, 1993
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(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
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Current liabilities:
Current portion of long-term debt $ 152,380 $ 104,660
Current portion of obligations under
capital leases 16,824 18,021
Accounts payable 498,811 512,604
Book overdrafts 181,102 161,851
Accrued salaries, wages and benefits 154,674 157,405
Accrued taxes 37,287 11,953
Other accruals 188,794 198,229
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Total current liabilities 1,229,872 1,164,723
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Long-term debt 501,262 414,301
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Obligations under capital leases 164,972 182,066
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Deferred income taxes 118,559 141,184
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Other non-current liabilities 133,719 154,326
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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 (24,986) (12,809)
Retained earnings 556,250 555,796
Treasury stock, at cost, 9,157 and
9,098 shares, respectively (363) (361)
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Total shareholders' equity 1,022,605 1,034,330
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Total liabilities and shareholders'
equity $3,170,989 $3,090,930
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See Notes to Quarterly Report on Pages 5 and 6.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
40 Weeks Ended
Dec. 4, 1993 Dec. 5, 1992
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 23,386 $ (149,371)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Provision for potential loss on Isosceles
investment - 151,238
Cumulative effect on prior years of changes
in accounting principles:
Income taxes - 64,500
Postretirement benefits - 26,500
Depreciation and amortization 180,948 176,127
Decrease in deferred income taxes
before cumulative effect (5,187) (61,098)
(Gain) loss on disposal of owned property 82 (3,608)
Increase in receivables (7,649) (10,450)
(Increase)decrease in inventories (16,382) 1,354
Increase in other current assets (10,590) (874)
Decrease in accounts payable (9,610) (32,777)
Increase (decrease) in accrued salaries,
wages and benefits (167) 549
Increase (decrease) in accrued taxes 24,472 (21,390)
Decrease in store closing reserves (36,254) (1,014)
Decrease in other accruals (9,945) (5,141)
Other (2,058) 15,782
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Net cash provided by operating activities 131,046 150,327
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (201,741) (143,332)
Proceeds from disposal of property 13,278 11,057
Acquisition of business net of
cash acquired (42,948) -
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Net cash used in investing activities (231,411) (132,275)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 140,103 21,467
Payment of long-term debt (5,132) (33,778)
Increase in book overdrafts 22,752 17,091
Principal payments on capital leases (13,630) (14,289)
Cash dividends (22,932) (22,932)
Proceeds from stock options exercised - 27
Purchase of treasury stock (2) (3)
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Net cash provided by (used in)
financing activities 121,159 (32,417)
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Effect of exchange rate changes on
cash and short-term investments (1,582) (2,146)
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NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 19,212 (16,511)
Cash and Short-Term Investments
at Beginning of Period 110,120 136,166
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CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 129,332 $ 119,655
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See Notes to Quarterly Report on Pages 5 and 6.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO QUARTERLY REPORT
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1) BASIS OF PRESENTATION
The consolidated financial statements for the 40 weeks ended December 4,
1993 and December 5, 1992 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 adjustments
associated with the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 109 and No. 106 and the provision for potential
loss on Isosceles investment. 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 1992 Annual Report on Form 10-K and Form 10-K/A.
Certain reclassifications have been made to the prior years' financial
statements in order to conform to the current year presentation.
2) ACQUISITIONS
On March 29, 1993, the Company acquired certain assets, including
inventory, of 48 Big Star stores in the Atlanta, Georgia area for
approximately $43 million. The acquisition has been accounted for as a
purchase and, accordingly, the results of operations are included in the
Statements of Consolidated Operations from the date of acquisition. The
Company is in the process of finalizing the fair value of assets acquired
and liabilities assumed based on current appraisals and assessments.
3) INCOME TAXES
The provision for income taxes for the 40 weeks ended December 4, 1993
reflects the increase in the corporate tax rate since the beginning of
the fiscal year, offset by retroactive targeted jobs tax credits as
prescribed in the Omnibus Budget Reconciliation Act of 1993.
4) INDEBTEDNESS
On January 7, 1994, subsequent to the end of the third quarter, the
Company issued $200 million of unsecured, non-callable 7.70% Senior Notes
due 2004. The net proceeds from the issuance of these Notes will be used
for general corporate purposes including the repayment of certain debt,
the construction of new stores, the remodeling of existing stores and the
closure of small outmoded stores.
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5) LABOR UNIONS, CANADIAN STRIKE
The Company has been in negotiations with Local Nos. 175 and 633, United
Food & Commercial Workers, regarding a collective bargaining agreement
involving approximately 6,500 employees in 63 "Miracle Mart", "Ultra
Mart" and other stores in Ontario, Canada. The Union struck 63 stores
on November 19, 1993. Because the Company has no ability to hire
replacement workers under Ontario law, the stores are closed for
business. The Company made an offer to settle the dispute which was
rejected by the union members on December 11, 1993. The Company cannot
predict the outcome of negotiations. Revenues of the 63 stores
approximate 25% of the total Canadian operations with gross margin rates
approximating the overall gross margin rates of the total Canadian
operations. Since the date of the strike, the Company has incurred one
time costs of $1.3 million mainly due to inventory losses on perishable
products which could not be removed from the stores due to picketing
activities. The Company estimates that its profitability and cash flow
may be negatively impacted by approximately $1 million per week in the
near term.
There are twenty-two significant union contracts expiring in 1993 and
1994 which have not yet been extended. These contracts affect
approximately 31,000 employees. These union contracts are either in the
early stages of negotiation or negotiations have not begun.
Included in the balance sheet caption "Other assets" is C$70 million
(U.S. $52 million) of goodwill related to the Miracle Food Mart
acquisition. Management periodically reassesses the appropriateness of
its goodwill balance based on forecasts of operating cash flow less
significant anticipated cash requirements. While cash flows have been
negatively impacted by the Canadian work stoppage described above, the
Company believes that the stoppage is temporary and that the cash flows
projected to be generated on an undiscounted basis should be sufficient
to recover the goodwill balance over its remaining life.
6) ADOPTION OF SFAS NO. 112 DURING FISCAL 1994
Statement of Financial Accounting Standards No. 112 "Employers Accounting
for Postemployment Benefits", will be effective for fiscal years
beginning after December 15, 1993 and will require 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 intends to adopt the statement effective February 27, 1994.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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MANAGEMENT'S DISCUSSION AND ANALYSIS
12 WEEKS ENDED DECEMBER 4, 1993
---------------------------------
OPERATING RESULTS
Sales for the third quarter ended December 4, 1993 of $2.3 billion decreased
$33 million or 1.4% from last year. A lower Canadian exchange rate
adversely affected sales by $24 million or 1.0%. Excluding the effects of
the change in exchange rates, sales decreased by $9 million or 0.4%.
Contributing factors were the closing of 81 outmoded stores principally in
the Company's major markets of the Northeast, Michigan and Canada (2.6%), a
strike in Canada's Miracle Food Mart chain (1.4%) and a reduced same store
sales rate of 1.0% in the U.S. and 0.8% in Canada (excluding the Miracle
Food Mart strike) offset by the acquisition of Big Star stores (2.5%) and
the opening of 21 new stores principally in the Northeast (2.0%). Same
store sales declines reflect the difficult sales climate and lack of
inflation both in the U.S and Canada. Average weekly sales per store were
approximately $164,400 versus $163,500 for the corresponding period of the
prior year for a 0.6% increase.
Gross margin as a percent of sales increased 0.3% to 28.4% in the third
quarter of 1993 from 28.1% for the third quarter of the prior year resulting
primarily from the continued benefits derived from the Company's centralized
purchasing function, changes in product mix and increased buying allowances
partly offset by increased special price reductions. Total gross margin
decreased $2 million mainly as a result of the negative effect of the
Canadian exchange rate of $6 million and $2 million decreased volume offset
by a net increase in rates of $6 million.
In the United States, gross margin as a percentage of sales increased 0.2%
to 28.3%, resulting in an increase in gross margin dollars of $4 million
while sales volume gains increased gross margin by $10 million.
In Canada, gross margin declined 11.5%, reflecting volume declines of $12
million due to the loss of sales volume in closed stores, the effect of the
Miracle Food Mart strike and a $6 million decline due to the negative
effects of the Canadian exchange rate offset by an improved gross margin
rate of 0.6%, increasing margins by $2 million.
Store operating, general and administrative expense as a percent of sales
increased to 27.8% from 27.7% for the corresponding period in the prior year
resulting primarily from increased costs and expenses associated with store
labor and occupancy partly offset by decreased customer/employee accident
costs. U.S. expenses increased $7 million principally due to the addition
of Big Star stores in 1993 offset by reduced expenses from store closures.
Canadian expenses were $12 million below the corresponding period in the
prior year as a result of reduced expenses from store closures coupled with
the decrease in the exchange rate and the effect of the Miracle Food Mart
strike.
Interest expense decreased from the previous year primarily due to reduced
capital lease obligations partially offset by higher outstanding borrowings.
Income before income taxes for the third quarter ended December 4, 1993 is
$0.6 million compared to a loss of $4.4 million for the comparable period in
the prior year.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
40 WEEKS ENDED DECEMBER 4, 1993
---------------------------------
OPERATING RESULTS
Sales for the 40 weeks ended December 4, 1993 of $8.0 billion decreased $102
million or 1.3% from the 40 weeks ended December 5, 1992. A lower Canadian
exchange rate adversely affected sales by $102 million or 1.3%. Other
factors were the closing of 110 outmoded stores principally in the Company's
major markets of the Northeast, Michigan and Canada (2.6%), reduced same
store sales (1.1%) and a strike in Canada's Miracle Food Mart chain (0.4%)
largely offset by the acquisition of Big Star stores (2.3%) and the opening
of 21 new stores principally in the Northeast (1.8%). U.S. same store sales
decline of 1.7% reflects last year's impact of the Kroger strike in the
Michigan region, the difficult sales climate and lack of inflation, largely
offset by improved same store sales in Canada of 1.1% (excluding the effects
of the Miracle Food Mart strike). Average weekly sales per store of
approximately $166,100 remained unchanged from the corresponding period of
the prior year.
Gross margin as a percent of sales increased to 28.6% for the current year
from 28.5% for the comparable period in the prior year resulting primarily
from the continued benefits derived from the Company's centralized
purchasing function and changes in product mix partly offset by decreased
buying allowances and increased special price reductions. Total gross
margin decreased $15 million primarily as a result of the negative effect of
the Canadian exchange rate of $29 million offset by a $14 million increase
in gross margin rates.
In the United States, gross margin as a percentage of sales decreased 0.1%
to 28.4%, decreasing margins by $9 million while sales volume increased
gross margin by $15 million.
In Canada, gross margin rate increased 1.4% resulting in increased gross
margin dollars of $23 million, offset by a $29 million decline due to
Canadian exchange rate declines and a decrease in sales volume of $15
million due to the loss of sales in closed stores and the effects of the
Miracle Food Mart strike.
Store operating, general and administrative expense as a percent of sales
increased to 27.6% from 27.2% for the comparable period in the prior year
resulting primarily from increased costs and expenses associated with store
occupancy and store labor partly offset by decreased customer/employee
accident costs. U.S. expenses increased $29 million mainly due to the
addition of the Big Star stores in 1993 offset by reduced expenses from
store closures. Canadian expenses decreased $31 million as a result of
reduced expenses from store closures coupled with the decrease in the
exchange rate and the effects of the Miracle Food Mart strike.
Interest expense decreased from the previous year primarily due to reduced
capital lease obligations and lower interest rates on short-term borrowings
partially offset by higher outstanding borrowings.
Income before taxes for the 40 weeks ended December 4, 1993 is $38.9 million
compared to a loss of $103.1 million for the comparable period in the prior
year. The prior year loss reflects a $151.2 million provision for potential
loss on the Company's total investment in Isosceles PLC. Pretax income
before this provision was $48.2 million.
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The provision for income taxes for the 40 weeks ended December 4, 1993
reflects the increase in the corporate tax rate since the beginning of the
fiscal year, offset by retroactive targeted jobs tax credits as prescribed
in the Omnibus Budget Reconciliation Act of 1993.
During the first quarter of fiscal 1992, the Company adopted SFAS Statement
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" and SFAS Statement No. 109, "Accounting for Income Taxes". As a
result, the Company reported non-recurring charges of $26.5 million and
$64.5 million, respectively, as the cumulative effect of these changes on
prior years. Income before the cumulative effect of the changes in
accounting principles and the provision to write-off the investment in
Isosceles was $30.9 million or $.81 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the third quarter with working capital of $49.2 million
compared to $56.8 million at the beginning of the fiscal year, primarily as
a result of a $47.7 million increase in the current portion of long-term
debt. The Company's cash and short-term investments increased $19.2 million
to $129.3 million during this period. The Company also has in excess of
$200 million in various available credit facilities. Proceeds from long-
term debt in the 40 weeks ended December 4, 1993 were primarily utilized to
fund the acquisition of Big Star of approximately $43 million.
On January 7, 1994, subsequent to the end of the third quarter, the Company
issued $200 million of unsecured, non-callable 7.70% Senior Notes due 2004.
The net proceeds from the issuance of these Notes will be used for general
corporate purposes including the repayment of certain debt, the construction
of new stores, the remodeling of existing stores and the closure of small
outmoded stores.
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 1993.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
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None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
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None
Item 4. Submission of Matters to a Vote of Security Holders
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None
Item 5. Other Information
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None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
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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: January , 1994 By: /s/ Kenneth A. Uhl
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
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