THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
FORM 10-Q
2ND QUARTER ENDED SEPTEMBER 7, 1996
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 September 7, 1996 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
------------
- -------------------------------------------------------------------------
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 7, 1996
----- ---------------------------------
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 September 7, 1996 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
------------
- -------------------------------------------------------------------------
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 7, 1996
----- ---------------------------------
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 7, September 9, September 7, September 9,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Sales $2,329,987 $2,341,171 $5,422,541 $5,476,685
Cost of merchandise sold (1,667,632) (1,672,068) (3,863,406) (3,897,770)
---------- ---------- ---------- ----------
Gross margin 662,355 669,103 1,559,135 1,578,915
Store operating, general and
administrative expense (627,802) (639,242) (1,471,839) (1,502,170)
---------- ---------- ---------- ----------
Income from operations 34,553 29,861 87,296 76,745
Interest expense, net (15,476) (16,006) (36,247) (38,352)
---------- ---------- ---------- ----------
Income before income taxes 19,077 13,855 51,049 38,393
Provision for income taxes (5,083) (4,471) (15,176) (14,459)
---------- ---------- ---------- ----------
Net Income 13,994 9,384 35,873 23,934
Retained earnings at
beginning of period 402,348 345,439 382,380 332,800
Cash dividends (1,911) (1,911) (3,822) (3,822)
---------- ---------- ---------- ----------
Retained earnings at
end of period $ 414,431 $ 352,912 $ 414,431 $ 352,912
========== ========== ========== ==========
Earnings per share:
Net Income $ .37 $ .25 $ .94 $ .63
========== ========== ========== ==========
Cash dividends $ .05 $ .05 $ .10 $ .10
========== ========== ========== ==========
Weighted average number of
common and common
equivalent shares
outstanding 38,252,259 38,220,333 38,281,559 38,220,333
========== ========== ========== ==========
See Notes to Quarterly Report on Page 5.
- 1 -
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
September 7, 1996 February 24, 1996
------------------ ------------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and short-term investments $ 117,999 $ 99,772
Accounts receivable 200,288 205,133
Inventories 832,240 826,510
Prepaid expenses and other assets 50,884 43,520
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Total current assets 1,201,411 1,174,935
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Property:
Property owned 1,478,087 1,461,165
Property leased 87,638 93,379
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Property-net 1,565,725 1,554,544
Other assets 157,085 131,368
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Total Assets $2,924,221 $2,860,847
========== ==========
See Notes to Quarterly Report on Page 5.
-2-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
September 7, 1996 February 24, 1996
------------------ ------------------
(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Current liabilities:
Current portion of long-term debt $ 29,598 $ 13,040
Current portion of obligations under
capital leases 12,901 13,125
Accounts payable 477,178 452,257
Book overdrafts 162,753 157,022
Accrued salaries, wages and benefits 125,576 127,133
Accrued taxes 52,916 59,407
Other accruals 145,412 161,984
---------- ----------
Total current liabilities 1,006,334 983,968
---------- ----------
Long-term debt 664,518 650,169
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Obligations under capital leases 123,280 129,887
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Deferred income taxes 122,110 120,904
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Other non-current liabilities 152,326 153,134
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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--38,220,333 shares 38,220 38,220
Capital surplus 453,121 453,121
Cumulative translation adjustment (50,119) (50,936)
Retained earnings 414,431 382,380
---------- ----------
Total shareholders' equity 855,653 822,785
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Total liabilities and shareholders'
equity $2,924,221 $2,860,847
========== ==========
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
Sept. 7,1996 Sept. 9, 1995
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $35,873 $ 23,934
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 122,798 122,740
Deferred income tax provision 2,556 5,837
(Gain) loss on disposal of owned property 519 (1,970)
Decrease in receivables 4,973 29,743
Increase in inventories (5,376) (6,770)
Increase in prepaid expenses and other
current assets (8,938) (10,098)
Increase in other assets (23,472) (2,967)
Increase in accounts payable 24,762 42,702
Decrease in accrued salaries,
wages and benefits (1,649) (11,368)
Increase (decrease) in accrued taxes (6,202) 2,363
Decrease in store closing reserves (6,375) (7,126)
Decrease in other accruals
and other liabilities (4,364) (2,644)
Other 536 (80)
--------- ---------
Net cash provided by operating activities 135,641 184,296
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (150,367) (109,004)
Proceeds from disposal of property 7,541 23,689
--------- ---------
Net cash used in investing activities (142,826) (85,315)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt 56,187 26,492
Proceeds under revolving lines
of credit and long-term borrowings 25,497 92,288
Payments on revolving lines of
credit and long-term borrowings (51,092) (210,639)
Increase in book overdrafts 5,590 7,102
Principal payments on capital leases (7,005) (7,885)
Cash dividends (3,822) (3,822)
--------- ---------
Net cash provided by (used in)
financing activities 25,355 (96,464)
--------- ---------
Effect of exchange rate changes on
cash and short-term investments 57 1,034
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NET INCREASE IN CASH AND
SHORT-TERM INVESTMENTS 18,227 3,551
Cash and Short-Term Investments
at Beginning of Period 99,772 128,930
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CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 117,999 $ 132,481
========= =========
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 7,
1996 and September 9, 1995 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. 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 1995 Annual Report on Form 10-K.
Certain reclassifications have been made to the prior periods' financial
statements in order to conform to the current period presentation.
2) INCOME TAXES
The income tax provisions recorded for the 28 week period ended in fiscal
years 1996 and 1995 reflect the Company's estimated expected annual tax
rates applied to their respective domestic and foreign financial results.
For the 28 week period ended in fiscal years 1996 and 1995, the income
tax provisions mainly reflect the taxes on U.S. income, as the Canadian
income tax expense is principally offset by the reversal of its valuation
allowance.
As of September 7, 1996, a valuation allowance existed for the entire
amount of the net deferred tax assets relating to the Canadian
operations. During the 28 week period ended in fiscal 1996, the Canadian
operations generated pretax earnings which resulted in the reversal of a
portion of the valuation allowance. Although Canada generated pretax
earnings, the Company was unable to conclude that the Canadian deferred
tax assets are more likely than not to be realized.
3) OTHER ASSETS
Other assets include notes receivable and equipment leases relating to
Food Basics franchising operations.
4) NEW ACCOUNTING STANDARD
Effective February 25, 1996 the Company adopted the disclosure provisions
of Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"). The Company will continue to
apply the methods prescribed by Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" with proforma disclosure of
net income and earnings per share as if the fair value based method of
SFAS 123 had been applied.
-5-
5 COMMON STOCK
A revision to the Maryland General Corporation Law has eliminated the
concept of Treasury shares. Therefore, shares of common stock reacquired
by a corporation constitute unissued shares. For financial reporting
purposes, reacquired shares are recorded as reductions to issued common
stock and to additional paid-in-capital. This change had no effect on
total Shareholders' equity.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
12 WEEKS ENDED SEPTEMBER 7, 1996
---------------------------------
OPERATING RESULTS
Sales for the second quarter ended September 7, 1996 of $2.3 billion
decreased $11 million or 0.5% from the prior year second quarter.
Contributing to this decrease is the Company's continuing program to
eliminate obsolete, underperforming stores, and the consequent closing of 53
stores during the first half of fiscal 1996, which includes 7 replacement
stores. Of the 53 store closings, 14 have already re-opened as Food Basics
Franchise stores in Canada and 6 are scheduled to re-open later in the year
as Food Basics Franchise stores. The closure of 126 stores, excluding
replacement stores, since the beginning of the second quarter of fiscal
1995, of which 36 have been converted to Food Basics Franchise stores in
Canada and 6 which will be converted to Food Basics Franchise stores later
in the year, reduced comparative sales by approximately $102 million or 4.4%
in the second quarter of 1996. The opening of 28 stores in new market areas
since the beginning of the second quarter of fiscal 1995 added approximately
$54 million or 2.3% to sales in the second quarter of fiscal 1996. As of
September 7, 1996, the Company serviced 36 Food Basics Franchise stores to
which the Company had wholesale sales of $41 million for the 12 weeks ended
September 7, 1996. Same store sales for the second quarter, including
replacement stores, remained flat from the prior year. Average weekly sales
per store were approximately $191,600 versus $179,700 for the corresponding
period of the prior year for a 6.6% increase.
Same store sales for U.S. operations, which include replacement stores,
remained flat from the prior year. In Canada, same store sales, which
include replacement stores, decreased 0.3% from the prior year.
Gross margin as a percent of sales decreased .15% to 28.43% in the second
quarter of fiscal 1996 from 28.58% for the second quarter of fiscal 1995,
resulting primarily from decreased gross margin rates in Canada and
increased promotional price reductions in the U.S. The gross margin dollar
decrease of $7 million is primarily the result of a decrease in sales volume
which had an impact of decreasing margin by $14 million and a decrease in
the Canadian exchange rate of $2 million, partially offset by an increase in
gross margin rates of $9 million. In the U.S., gross margin increased $5
million, primarily resulting from an increase in gross margin rates of $8
million partially offset by a decrease in sales volume which had an impact
of decreasing margin by $3 million. In Canada, gross margin decreased $12
million, primarily resulting from the effect of a decrease in sales volume
which had an impact of decreasing margin by $11 million and a lower Canadian
exchange rate resulting in a decrease of $2 million, partially offset by an
increase in gross margin rates of $1 million.
Store operating, general and administrative expense as a percent of sales
decreased to 26.94% from 27.30% for the corresponding period in the prior
year resulting primarily from reduced advertising costs in both the U.S. and
Canada and reduced occupancy costs in Canada.
-7-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Interest expense-net decreased $0.5 million from the previous year,
primarily due to an increase in interest income of $0.7 million. In both
the U.S. and Canada, average borrowings increased while average interest
rates decreased, resulting in interest expense increasing $0.2 million.
Income before income taxes for the 12 weeks ended September 7, 1996 was
$19.1 million compared to $13.9 million for the comparable period in the
prior year for an increase of $5.2 million or 37.7%. The increase is mainly
the result of lower store operating, general and administrative expenses of
$11.4 million and lower net interest expense of $0.5 million, partially
offset by lower gross margin of $6.7 million.
The income tax provisions recorded for the 28 week period ended in fiscal
years 1996 and 1995 reflect the Company's estimated expected annual tax
rates applied to their respective domestic and foreign financial results.
The second quarter 1996 and 1995 provisions mainly reflect the taxes on U.S.
income, as the Canadian income tax expense is principally offset by the
reversal of its income tax valuation allowance.
MANAGEMENT'S DISCUSSION AND ANALYSIS
28 WEEKS ENDED SEPTEMBER 7, 1996
--------------------------------
OPERATING RESULTS
Sales for the 28 weeks ended September 7, 1996 of $5.4 billion decreased $54
million or 1.0% from last year. Contributing to this decrease is that the
Company closed 159 stores since the beginning of fiscal 1995, of which 32
have been converted to Food Basics Franchise stores in Canada and 6 which
will be converted to Food Basics Franchise stores later in the year, and 8
which were sold in the Rhode Island market in the first quarter of fiscal
1995. The 159 store closures, excluding replacement stores, since the
beginning of fiscal 1995 reduced comparative sales by approximately $267
million or 4.9% in the first two quarters of fiscal 1996. The opening of 28
stores in new market areas since the beginning of fiscal 1995 added
approximately $150 million or 2.7% to sales in the first two quarters of
fiscal 1996. As of September 7, 1996, the Company serviced 36 Food Basics
Franchise stores to which the Company had year to date wholesale sales of
$75 million. Same store sales, including replacement stores, for the 28
weeks decreased 0.2% from the prior year. Average weekly sales per store
were approximately $189,300 versus $177,800 for the corresponding period of
the prior year for a 6.5% increase.
Year to date sales for U.S. operations have declined, with same store sales,
which include replacement stores, down 0.3% from the prior year. In Canada,
year to date sales have decreased, with same store sales, including
replacement stores, remaining flat from the prior year.
-8-
Gross margin as a percent of sales decreased .08% to 28.75% from 28.83% for
the prior year resulting primarily from decreased gross margin rates in
Canada and increased promotional price reductions in the U.S., partially
offset by decreased promotional price reductions in Canada. The gross
margin dollar decrease of $20 million is primarily the result of a decrease
in sales volume which had an impact of decreasing margin by $38 million and
a lower Canadian exchange rate resulting in a decrease of $2 million,
partially offset by an increase in gross margin rates of $20 million. In the
U.S., gross margin increased $4 million, primarily resulting from increased
gross margin rates of $20 million, partially offset by a decrease in sales
volume which had an impact of decreasing margin by $16 million. In Canada,
gross margin decreased $24 million, primarily resulting from a decrease in
sales volume which had an impact of decreasing margin by $22 million and a
lower Canadian exchange rate resulting in a decrease of $2 million.
Store operating, general and administrative expense as a percent of sales
decreased to 27.14% from 27.43% for the prior year resulting primarily from
reduced advertising costs in both the U.S. and Canada and reduced store
labor costs and occupancy costs in Canada.
Interest expense-net, decreased $2.1 million from the previous year
primarily due to an increase in interest income of $1 million, coupled with
a $1.1 million decrease in interest expense resulting from decreases in
average rates and capital lease interest expense in both the U.S. and
Canada.
Income before income taxes for the 28 week period ended September 7, 1996
was $51.0 million compared to $38.4 million for the comparable period of the
prior year for an increase of approximately $12.6 million or 33%. The
increase in mainly the result of lower store operating, general and
administrative expenses of $30.3 million and lower net interest expense of
$2.1 million, partially offset by lower gross margin of $19.8 million.
The income tax provisions recorded in the first 28 week period of fiscal
years 1996 and 1995 reflects the Company's estimated expected annual tax
rates applied to their respective domestic and foreign financial results.
The first and second quarter 1996 and 1995 provisions mainly reflect the
taxes on U.S. income, as the Canadian income tax expense is principally
offset by the reversal of its income tax valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the second quarter with working capital of $195 million
compared to $191 million at the beginning of the fiscal year. The Company
had cash and short-term investments aggregating $118 million at the end of
the second quarter of fiscal 1996 compared to $100 million at the end of
fiscal 1995.
The Company has a U.S. $400 million and a Canadian $75 million unsecured,
five year revolving credit agreement which expires in December, 2000. In
addition, the Company also has various uncommitted lines of credit with
numerous banks. As of September 7, 1996, the Company had approximately $395
million available in credit facilities of which $380 million were committed
facilities.
-9-
The Company's loan agreements and certain of its notes contain various
financial covenants which require among other things, minimum net worth and
maximum levels of indebtedness and lease commitments. The Company was in
compliance with all such covenants as of September 7, 1996.
For the 28 weeks ended September 7, 1996, capital expenditures totaled $150
million, which included 17 new stores and 48 remodels and enlargements. The
Company expects to have additional capital expenditures of approximately
$160 million throughout the remainder of fiscal 1996.
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 1996.
-10-
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 - Matters were previously reported on the First
Quarter ended June 15, 1996 Form 10-Q.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
-11-
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 11, 1996 By: /s/ Kenneth A. Uhl
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
-12-
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 11, 1996 By:
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
-12-
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GREAT
ATLANTIC & PACIFIC TEA COMPANY, INC. 10-Q FOR THE SECOND QUARTER ENDED SEPTEMBER
7, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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