THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
FORM 10-Q
3RD QUARTER ENDED DECEMBER 2, 1995
Conformed 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 2, 1995 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
- ------------------------------------- -----
(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 December 2, 1995
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Common stock - $1 par value 38,220,333 shares
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 2, 1995 Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
----------------------------------------------
(Exact name of registrant as specified in charter)
Maryland 13-1890974
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive, Montvale, New Jersey 07645
- ------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 201-573-9700
------------
- -------------------------------------------------------------------------
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 December 2, 1995
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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 40 Weeks Ended
December 2, December 3,December 2, December 3,
1995 1994 1995 1994
----------- ----------- ----------- -----------
Sales $2,293,597 $2,345,597 $7,770,282 $7,961,870
Cost of merchandise sold (1,627,476) (1,675,025) (5,525,246) (5,697,743)
---------- ---------- ---------- ----------
Gross margin 666,121 670,572 2,245,036 2,264,127
Store operating, general and
administrative expense
(Note 4) (636,886) (688,140) (2,139,056) (2,224,049)
Write-off of goodwill and
long-lived assets (Note 3) - (127,000) - (127,000)
---------- ---------- ---------- ----------
Income (loss) from operations 29,235 (144,568) 105,980 (86,922)
Interest expense (16,929) (17,272) (55,281) (54,166)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and cumulative effect
of accounting change 12,306 (161,840) 50,699 (141,088)
Provision for income taxes
(Note 5) (4,571) (23,825) (19,030) (31,275)
---------- ---------- ---------- ----------
Income (loss) before cumulative
effect of accounting change 7,735 (185,665) 31,669 (172,363)
Cumulative effect on prior years of
change in accounting principle:
Postemployment benefits - - - (4,950)
---------- ---------- ---------- ----------
Net income (loss) 7,735 (185,665) 31,669 (177,313)
Retained earnings at
beginning of period 352,912 522,243 332,800 529,179
Cash dividends (1,911) (7,644) (5,733) (22,932)
---------- ---------- ---------- ----------
Retained earnings at
end of period $ 358,736 $ 328,934 $ 358,736 $ 328,934
========== ========== ========== ==========
Earnings (loss) per share:
Income (loss) before
cumulative effect of
accounting change $ .20 $ (4.86) $ .83 $ (4.51)
Cumulative effect on prior years of
change in accounting principle:
Postemployment benefits - - - (.13)
---------- ---------- ---------- ----------
Net income (loss) $ .20 $ (4.86) $ .83 (4.64)
========== ========== ========== ==========
Cash dividends $ .05 $ .20 $ .15 $ .60
========== ========== ========== ==========
Weighted average number of
shares outstanding 38,220,483 38,220,333 38,220,483 38,220,333
========== ========== ========== ==========
See Notes to Quarterly Report on Pages 5 and 6.
-1-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
December 2, 1995 February 25, 1995
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(Unaudited)
ASSETS
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Current assets:
Cash and short-term investments $ 113,480 $ 128,930
Accounts receivable 186,382 205,619
Inventories 896,149 811,964
Prepaid expenses and other assets 55,281 47,218
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Total current assets 1,251,292 1,193,731
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Property:
Property owned 1,448,411 1,466,243
Property leased 98,417 107,494
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Property-net 1,546,828 1,573,737
Other assets 129,763 127,320
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Total Assets $2,927,883 $2,894,788
========== ==========
See Notes to Quarterly Report on Pages 5 and 6.
-2-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
December 2, 1995 February 25, 1995
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(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Current liabilities:
Current portion of long-term debt $ 37,979 $ 112,821
Current portion of obligations under
capital leases 13,885 14,492
Accounts payable 484,747 447,081
Book overdrafts 150,671 157,521
Accrued salaries, wages and benefits 143,769 158,109
Accrued taxes 52,149 51,345
Other accruals 166,993 155,085
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Total current liabilities 1,050,193 1,096,454
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Long-term debt 686,609 612,473
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Obligations under capital leases 136,445 146,400
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Deferred income taxes 121,756 118,579
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Other non-current liabilities 132,639 145,968
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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 (Note 5) (49,836) (49,227)
Retained earnings 358,736 332,800
Treasury stock, at cost, 9,157 shares (363) (363)
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Total shareholders' equity 800,241 774,914
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Total liabilities and shareholders'
equity $2,927,883 $2,894,788
========== ==========
See Notes to Quarterly Report on Pages 5 and 6.
-3-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
40 Weeks Ended
December 2, December 3,
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 31,669 $(177,313)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Cumulative effect on prior years of change
in accounting principle:
Postemployment benefits - 4,950
Write-off of goodwill and long-lived assets - 127,000
Depreciation and amortization 174,697 185,604
Deferred income tax provision on income
before cumulative effect 5 22,614
Gain on disposal of owned property (1,451) (1,305)
(Increase) decrease in receivables 19,557 (22,587)
Increase in inventories (81,709) (60,835)
Increase in other current assets (4,676) (8,614)
Increase in accounts payable 34,057 22,432
Decrease in accrued salaries,
wages and benefits (15,029) (3,747)
Increase (decrease) in accrued taxes 918 2,085
Increase (decrease) in store closing reserves (13,200) 5,027
Increase (decrease) in other accruals and
other liabilities 10,535 (32,376)
Other (4,087) 8,226
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Net cash provided by operating activities 151,286 71,161
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (165,953) (163,745)
Proceeds from disposal of property 26,294 7,673
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Net cash used in investing activities (139,659) (156,072)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt 6,183 30,887
Proceeds under revolving lines of credit
and long-term borrowings 761,985 96,031
Payments on revolving lines of credit
and long-term borrowings (771,075) (57,902)
Increase (decrease) in book overdrafts (7,789) 55,921
Principal payments on capital leases (11,133) (12,140)
Cash dividends (5,733) (22,932)
--------- ---------
Net cash (used in) provided by financing
activities (27,562) 89,865
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Effect of exchange rate changes on
cash and short-term investments 485 (458)
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NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS (15,450) 4,496
Cash and Short-Term Investments
at Beginning of Period 128,930 124,236
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CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 113,480 $ 128,732
========= =========
See Notes to Quarterly Report on Pages 5 and 6.
-4-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO QUARTERLY REPORT
-------------------------
1) BASIS OF PRESENTATION
The consolidated financial statements for the 40 weeks ended December 2,
1995 and December 3, 1994 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" (Note 2), the write-off of goodwill and long-lived assets
(Note 3), the provision for employee buy-out costs (Note 4) and the
valuation allowance recorded for deferred tax assets (Note 5). 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 1994 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 February 27, 1994. The effect of
adopting the Statement had an immaterial effect on the financial results
before the cumulative effect of accounting change for the interim periods
presented.
3) WRITE-OFF OF GOODWILL AND LONG-LIVED ASSETS
During the third quarter of fiscal 1994, the Company recorded a non-cash
charge of $127 million reflecting $50 million for the write-off of
goodwill related to the acquisition of Miracle Food Mart ("Miracle")
stores in Canada and $77 million for the write-down of certain Miracle
fixed assets. Miracle experienced a work stoppage for a 14-week period
at the end of fiscal 1993. Under Canadian labor laws the stores were
closed during this time period. The labor dispute was settled and the
stores reopened for business on February 25, 1994. The Company
anticipated that the new labor agreement would have a positive impact on
-5-
operating results assuming historical sales levels could be attained.
Through the first half of fiscal 1994, the Company expended significant
promotional efforts in order to regain its pre-strike sales levels. The
sales performance through the first half of fiscal 1994 was disappointing
and the Company continued to monitor Miracle's performance through the
third quarter. Sales performance in the third quarter continued to be
negative when compared to pre-strike sales levels. The Company no longer
believed that Miracle's negative operating performance was temporary and
accordingly, revised its future expected cash flow projections. These
revised projections indicated that the goodwill balance would not be
recoverable over its remaining life. Further, these projections
indicated that the operating results of Miracle would not be sufficient
to absorb the depreciation and amortization of certain of its operating
fixed assets. Accordingly, Miracle's goodwill balance was written-off
and fixed assets relating to Miracle stores which were expected to
continue to generate operating losses were written-down as of the end of
the third quarter of fiscal 1994.
4) STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
Included in "Store operating, general and administrative expense" in the
third quarter of fiscal 1994 is a charge of $25 million to cover the cost
of Canadian employee buy-outs which were offered to certain employees in
conjunction with the Company's decision to convert a significant number
of its Ontario-based stores to a low-cost format. In addition, the
Company recorded a charge of $17 million to cover the cost of closing 13
non-Miracle stores during fiscal 1995.
5) INCOME TAXES
During the third quarter of fiscal 1994, the Company recorded a reduction
of its net deferred tax assets of approximately $16 million. Such amount
was comprised of a $43 million charge to provide a valuation allowance
against previously recorded Canadian deferred tax assets for which, based
on current available evidence, it is more likely than not that such
deferred tax asset will not be realized. Offsetting this charge was the
reversal of a previously recorded liability in the amount of $27 million
representing the taxes associated with the undistributed earnings of its
Canadian operations as a result of the Company's election to permanently
reinvest these prior years earnings. Further, this decision resulted in
a direct charge to equity of approximately $20 million to eliminate the
deferred tax asset related to the Cumulative Translation Adjustment.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
12 WEEKS ENDED DECEMBER 2, 1995
-------------------------------
OPERATING RESULTS
Sales for the third quarter ended December 2, 1995 of $2.3 billion decreased
$52 million or 2.2% from last year. Contributing to this decrease is the
Company's continuing program to eliminate obsolete, unproductive stores, and
the consequent closing of 82 stores during the first three quarters of
fiscal 1995. The closure of 106 stores, excluding replacement stores, since
the beginning of the third quarter of fiscal 1994 reduced comparative sales
by $90 million or 3.8% in the third quarter of fiscal 1995. The opening of
25 new stores, excluding replacement stores, since the beginning of the
third quarter of fiscal 1995 added approximately $54 million or 2.3% to
sales in the third quarter of fiscal 1995. Same store sales for the third
quarter, including replacement stores, decreased by 0.8% from the prior
year. Average weekly sales per store were approximately $178,200 versus
$172,600 for the corresponding period of the prior year for a 3.2% increase.
Third quarter sales for U.S. operations declined, with same store sales,
which include replacement stores, down 0.8% from the prior year as a result
of increased competitive activity in response to tighter customer spending.
In Canada, third quarter same store sales, including replacement stores,
decreased 0.9% from the prior year.
Gross margin as a percent of sales increased 0.4% to 29.0% in the third
quarter of 1995 from 28.6% for the third quarter of the prior year resulting
primarily from increased gross margin rates in both the U.S. and Canada
partly offset by increased promotional price reductions in the U.S. The
gross margin dollar decrease of $4 million is a result of a decrease in
volume of $15 million, partly offset by an increase in gross margin rates of
$11 million. The U.S. gross margin decreased $4 million principally as a
result of decreased volume of $9 million partly offset by an increase in
gross margin rates of $5 million.
Store operating, general and administrative expense as a percent of sales
for the third quarter of fiscal 1995 increased to 27.8% from 27.6% for the
same period in the prior year, after excluding a charge of $25 million for
employee buy-out costs incurred as a result of new labor agreements entered
into in Canada and the charge of $17 million for the cost of closing 13 non-
Miracle stores in Canada recorded in the third quarter of fiscal 1994. The
0.2% increase resulted primarily from increased costs and expenses
associated with store operating expenses in the U.S., partly offset by
reduced advertising costs in the U.S. and reduced labor costs in Canada.
However, store operating, general and administrative expense of $637 million
for the third quarter 1995 decreased $9 million from the third quarter 1994,
after excluding the charges noted above of $25 million and $17 million, as a
result of reduced labor costs in Canada, and a decrease in U.S. advertising,
offset by an increase in U.S. store operating expenses.
During the third quarter of fiscal 1994 the Company recorded a charge of
$127 million representing the write-off of $50 million of goodwill and the
write-down of $77 million of fixed assets relating to Miracle stores which
will continue to generate operating losses.
-7-
In November of 1993, the Miracle stores went on strike for a 14-week period.
When the Miracle strike ended in late February 1994, Management determined
at that time that the goodwill balance associated with Miracle stores would
be recoverable over its remaining life. This conclusion was based upon
projections which comprehended (i) the historical performance and market
shares of the Miracle stores in pre-strike periods, (ii) the labor savings
projected to be realized as a result of the favorable terms of the
settlement (principally wage and benefit concessions and the ability to use
newly hired part-time employees after a certain level of full and part-time
union employment had been realized), and (iii) the regaining of pre-strike
sales and operating margins which was anticipated to occur because of the
implementation of extensive promotional programs in the Miracle stores. The
Company's operating projections for the post-strike period indicated that
Miracle would generate income from operations and would be able to recover
the amortization of the goodwill balance over its remaining life. Since the
Canadian labor laws preclude the replacement of striking workers, the strike
resulted in a complete shutdown of all of the Miracle stores. The strike
was resolved on February 20, 1994 and the Company paid $17 million in labor
settlement costs. These stores were reopened for business commencing
February 25, 1994. Following the strike, Management instituted extensive
and costly promotional campaigns designed to assist in its goal of
reestablishing pre-strike sales levels.
Management continued to assess the performance of the Miracle stores during
the post-strike period. The anticipated recovery of Miracle sales and
operating margins was not yet realized through June 18, 1994, the end of the
Company's first fiscal quarter or September 10, 1994, the end of the
Company's second fiscal quarter. Through the second quarter same store
sales and margins had declined significantly when compared to the prior year
pre-strike levels. At that time, Management concluded that the following
factors were the principal reasons why the recovery had not yet been
realized: (i) increased price competition from Miracle competitors in
response to the promotional activities implemented by Miracle, (ii) the
inability to yet utilize part-time employees (a key element of the strike
settlement which required increased sales levels to be effective) and (iii)
the continuing effects of the complete shutdown during the strike.
Management continued to believe that these negative trends were temporary
and that more time was required to determine the effectiveness of the
promotional programs and the changed competitive environment. Management
continued to closely monitor the operating performance and sales levels
during the third quarter.
Despite the extensive promotional programs, in the period through December
3, 1994, the operating performance of Miracle did not improve and the
negative sales trends and deteriorating margin levels continued. Management
believed that the negative results which have occurred subsequent to the
strike were no longer temporary and, accordingly, prior operating cash flow
projections of Miracle were revised. These revised projections indicated
that the Miracle goodwill balance would not be recovered over its remaining
life and the full amount thereof should be written-off.
Further, the levels of sales and operating cash flow achieved through the
first nine months of the current fiscal year, coupled with the reduced
expectations of future Miracle operations, indicated that Miracle's
operating results would not be sufficient to absorb the depreciation and
amortization of certain of its operating fixed assets. In order to measure
this impairment, the Company analyzed the projected operating performance of
each store comprising the Miracle division and reflected the impairment of
-8-
the fixed assets attributable to those stores which the Company now believes
will continue to generate an operating loss before taking into account
depreciation and amortization expenses. The Company has no current plans to
close Miracle stores in spite of their negative performance and believes
that the total Canadian operations will be able to absorb their projected
fixed costs. The Company also believes that the fixed assets related to the
Canadian operations exclusive of Miracle are recoverable from operations
over their remaining useful lives.
Based on current information, the Company has no reasonable basis to believe
that any existing goodwill on the books of the Company is required to be
written off. After giving effect to the Miracle goodwill write-off, there
is currently no goodwill recorded on the books of the Canadian operations.
Interest expense decreased $0.3 million from the previous year. The
decrease is a result of a decrease in the U.S. resulting from reduced
borrowings, offset by an increase in Canadian interest expense resulting
from an increase in borrowings and interest rates.
Income before taxes for the third quarter ended December 2, 1995 of $12.3
million increased 72% from the same period last year after excluding the
charge for the write-off of goodwill and long-lived assets of $127 million,
the employee buy-out provision of $25 million and the provision for store
closings of $17 million. The increase is mainly the result of the decrease
in store operating, general and administrative expense of approximately $9
million.
The income tax provision recorded in the third quarter of fiscal years 1995
and 1994 reflects the Company's estimated expected annual tax rates applied
to their respective domestic and foreign financial results. The third
quarter 1995 provision mainly reflects the taxes on the U.S. income, as the
Canadian income tax expense is principally offset by the reversal of the
valuation allowance previously established.
The income tax provision recorded in the third quarter of fiscal 1994
includes a charge of $43 million for the establishment of a valuation
allowance to offset previously recorded Canadian deferred tax benefits
resulting from loss carryforwards for which, based on current available
evidence, it is more likely than not that such deferred tax asset will not
be realized. Offsetting this charge was the reversal of $27 million
representing the taxes associated with the undistributed earnings of its
Canadian operations as a result of the Company's election to permanently
reinvest these prior years earnings. Further, this decision also resulted
in a direct charge to equity to eliminate the deferred tax asset of
approximately $20 million related to the Cumulative Translation Adjustment.
In addition, third quarter fiscal 1994 results were further affected by the
Company's decision to no longer record income tax benefits on current
Canadian losses.
As of December 2, 1995, the Company is continuing to fully reserve for all
Canadian deferred tax assets.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS
40 WEEKS ENDED DECEMBER 2, 1995
-------------------------------------
OPERATING RESULTS
Sales for the 40 weeks ended December 2, 1995 of $7.8 billion decreased $192
million or 2.4% from last year. Contributing to this decrease is that the
Company closed 159 stores since the beginning of fiscal 1994, of which eight
were sold to Edwards Super Food Stores in the first quarter of fiscal 1995.
The store closures, excluding replacement stores, since the beginning of
fiscal 1994 reduced comparative sales by approximately $308 million or 3.9%
in the first three quarters of fiscal 1995. The opening of 31 stores,
excluding replacement stores, since the beginning of fiscal 1994 added
approximately $165 million or 2.1% to sales in the first three quarters of
fiscal 1995. Same store sales, including replacement stores, for the 40
weeks decreased 0.7% from the prior year. Average weekly sales per store
were approximately $177,900 versus $172,300 for the same period of the prior
year for a 3.3% increase.
Year to date sales for U.S. operations declined, with same store sales,
which include replacement stores, down 0.5% from the prior year. In Canada,
year to date sales decreased, with same store sales, including replacement
stores, down 1.8% from the prior year.
Gross margin as a percent of sales increased 0.5% to 28.9% for the current
year from 28.4% for the prior year resulting primarily from increased gross
margin rates in both the U.S. and Canada partly offset by increased
promotional price reductions in the U.S. The gross margin dollar decrease
of $19 million is a result of a decrease in volume of $56 million partly
offset by an increase in gross margin rates of $37 million. The U.S. gross
margin decreased $34 million principally as a result of decreased volume of
$42 million partly offset by an increase in gross margin rates of $8
million. In Canada, gross margin increased $15 million, consisting of an
increase in gross margin rates of $27 million offset by volume declines of
$12 million.
Store operating, general and administrative expense as a percent of sales
for the 40 weeks ended December 2, 1995 increased to 27.5% from 27.4% for
the prior year after excluding a charge of $25 million for employee buy-out
costs incurred as a result of new labor agreements entered into in Canada
and a charge of $17 million to cover the cost of closing 13 non-Miracle
stores in Canada recorded in the third quarter of fiscal 1994. The 0.1%
increase resulted primarily from increased costs and expenses associated
with store operating expenses in the U.S., partly offset by reduced labor
and advertising costs in both the U.S. and Canada. However, store
operating, general and administrative expense of $2.1 billion for the 40
weeks ended December 2, 1995 decreased $43 million from the same period last
year, after excluding the charges noted above of $25 million and $17
million, mainly as a result of reduced labor costs in Canada, a decrease in
U.S. and Canadian advertising, offset by an increase in U.S. store operating
expenses.
As discussed in detail on pages 7, 8 and 9, the Company recorded a charge in
the third quarter of fiscal 1994 of $127 million representing the write-off
of $50 million of goodwill and the write down of $77 million of fixed assets
relating to Miracle stores which will continue to generate operating losses.
-10-
Interest expense increased $1.1 million from the previous year, principally
in Canada on increased borrowings and an increase in interest rates, partly
offset by decreased borrowings and a decrease in interest expense on capital
leases in the U.S.
Income before taxes for the 40 weeks ended December 2, 1995 of approximately
$50.7 million increased from $27.9 million or 82% from the same period last
year, after excluding the charge for the write-off of goodwill and long-
lived assets of $127 million, the employee buy-out provision of $25 million
and the provision for store closings of $17 million. The increase is mainly
the result of a $43 million decrease in store operating, general and
administrative expense, partially offset by a decrease in gross margin of
$19 million.
The income tax provision for the first 40 weeks of fiscal years 1995 and
1994 reflects the Company's estimated expected annual tax rates applied to
their respective domestic and foreign financial results. In the first and
second quarters of fiscal year 1994, the income tax provision included a
deferred tax benefit relating to the Canadian operating results.
In addition, the income tax provision for the 40 weeks ended December 3,
1994 includes a charge of $43 million for the establishment of a valuation
allowance to offset previously recorded Canadian deferred tax benefits
resulting from loss carryforwards for which, based on current available
evidence, it is more likely than not that such deferred tax asset will not
be realized. Offsetting this charge was the reversal of $27 million
representing the taxes associated with the undistributed earnings of its
Canadian operations as a result of the Company's election to permanently
reinvest these prior years earnings. Further, this decision also resulted
in a direct charge to equity to eliminate the deferred tax asset of
approximately $20 million related to the Cumulative Translation Adjustment.
The third quarter fiscal 1994 results were further affected by the Company's
decision to no longer record income tax benefits on current Canadian losses.
As of December 2, 1995 the Company is continuing to fully reserve for all
Canadian deferred tax assets.
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 third quarter of fiscal 1995 with working capital of
$201 million compared to $97 million at the beginning of the fiscal year.
The Company had cash and short-term investments aggregating $113 million at
the end of the third quarter of fiscal 1995 compared to $129 million at the
end of fiscal 1994.
On October 17, 1995, the Company's Canadian subsidiary, The Great Atlantic &
Pacific Company of Canada, Ltd., ("A&P Canada") issued U.S. $75 million of
unsecured, non-callable 7.78% Notes due November 2000. The net proceeds
from the issuance of these Notes was used to repay indebtedness under the
Canadian subsidiary's revolving credit facility.
At December 2, 1995, the Company had approximately $200 million available
under its revolving credit agreements and approximately $45 million in bank
lines of credit.
-11-
In December 1995, subsequent to the end of the third quarter, syndicates of
banks provided an aggregate of U.S. $475 million unsecured, five year
revolving credit facilities to the Company and A&P Canada.
The Company's loan agreements and public bonds contain certain financial
covenants and limitations on the incurrence of additional indebtedness. The
Company was in compliance with such covenants as of December 2, 1995.
For the 40 weeks ended December 2, 1995, capital expenditures totaled $166
million, which included 26 new stores and 58 remodels and enlargements. The
Company expects to have capital expenditures of approximately $47 million in
the fourth quarter of fiscal 1995.
The Company's 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 1995.
-12-
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
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
10 - Competitive Advance and Revolving Credit Facilities
Agreement dated as of December 12, 1995.
-13-
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 16, 1996 By: /s/ Kenneth A. Uhl
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
-14-
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 16, 1996 By:
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
-14-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GREAT
ATLANTIC & PACIFIC TEA COMPANY, INC. 10-Q FOR THE THIRD QUARTER ENDED DECEMBER
2, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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<PERIOD-TYPE> QTR-3
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<PERIOD-END> DEC-02-1995
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