THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
FORM 10-Q
3RD QUARTER ENDED NOVEMBER 30, 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 November 30, 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
------------
- -------------------------------------------------------------------------
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 November 30, 1996
----- ----------------------------------
Common stock - $1 par value 38,221,716 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 November 30, 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
------------
- -------------------------------------------------------------------------
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 November 30, 1996
----- ---------------------------------
Common stock - $1 par value 38,221,716 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 share amounts)
(Unaudited)
12 Weeks Ended 40 Weeks Ended
November 30, December 2 November 30, December 2,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Sales $2,318,762 $2,293,597 $7,741,303 $7,770,282
Cost of merchandise sold (1,650,098) (1,627,476) (5,513,504) (5,525,246)
---------- ---------- ---------- ----------
Gross margin 668,664 666,121 2,227,799 2,245,036
Store operating, general and
administrative expense (634,266) (636,886) (2,106,105) (2,139,056)
---------- ---------- ---------- ----------
Income from operations 34,398 29,235 121,694 105,980
Interest expense, net (16,557) (16,929) (52,804) (55,281)
---------- ---------- ---------- ----------
Income before income taxes 17,841 12,306 68,890 50,699
Provision for income taxes (3,750) (4,571) (18,926) (19,030)
---------- ---------- ---------- ----------
Net income 14,091 7,735 49,964 31,669
Retained earnings at
beginning of period 414,431 352,912 382,380 332,800
Cash dividends (1,911) (1,911) (5,733) (5,733)
---------- ---------- ---------- ----------
Retained earnings at
end of period $ 426,611 $ 358,736 $ 426,611 $ 358,736
========== ========== ========== ==========
Earnings per share:
Net income $ .37 $ .20 $ 1.31 $ .83
========== ========== ========== ==========
Cash dividends $ .05 $ .05 $ .15 $ .15
========== ========== ========== ==========
Weighted average number of
common and common
equivalent shares
outstanding 38,267,453 38,220,483 38,278,049 38,220,483
========== ========== ========== ==========
See Notes to Quarterly Report on Page 5.
-1-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
November 30, 1996 February 24, 1996
------------------ ------------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and short-term investments $ 118,026 $ 99,772
Accounts receivable 206,305 205,133
Inventories 911,392 826,510
Prepaid expenses and other assets 36,576 43,520
---------- ----------
Total current assets 1,272,299 1,174,935
---------- ----------
Property:
Property owned 1,497,040 1,461,165
Property leased 91,352 93,379
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Property-net 1,588,392 1,554,544
Other assets 171,240 131,368
---------- ----------
Total Assets $3,031,931 $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)
November 30, 1996 February 24, 1996
------------------ ------------------
(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Current liabilities:
Current portion of long-term debt $ 15,525 $ 13,040
Current portion of obligations under
capital leases 12,851 13,125
Accounts payable 474,892 452,257
Book overdrafts 227,079 157,022
Accrued salaries, wages and benefits 135,187 127,133
Accrued taxes 53,621 59,407
Other accruals 139,462 161,984
---------- ----------
Total current liabilities 1,058,617 983,968
---------- ----------
Long-term debt 712,576 650,169
---------- ----------
Obligations under capital leases 126,882 129,887
---------- ----------
Deferred income taxes 110,170 120,904
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Other non-current liabilities 155,329 153,134
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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 and outstanding
November 1996 - 38,221,716 shares,
February 1996 - 38,220,333 shares 38,222 38,220
Capital surplus 453,159 453,121
Cumulative translation adjustment (49,635) (50,936)
Retained earnings 426,611 382,380
---------- ----------
Total shareholders' equity 868,357 822,785
---------- ----------
Total liabilities and shareholders'
equity $3,031,931 $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)
40 Weeks Ended
November 30, December 2,
1996 1995
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 49,964 $ 31,669
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 176,737 174,697
Deferred income tax provision (benefit) (9,115) 5
(Gain) Loss on disposal of owned property 908 (1,451)
(Increase) decrease in receivables (574) 19,557
Increase in inventories (82,508) (81,709)
(Increase) decrease in prepaid expenses
and other current assets 4,721 (4,676)
Increase in other assets (27,583) (2,943)
Increase in accounts payable 21,283 34,057
Increase (decrease) in accrued salaries,
wages and benefits 7,579 (15,029)
Increase (decrease) in accrued taxes (4,944) 918
Decrease in store closing reserves (6,969) (13,200)
Increase (decrease) in other accruals and
other liabilities (9,848) 10,535
Other (613) (1,144)
--------- ---------
Net cash provided by operating activities 119,038 151,286
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (229,154) (165,953)
Proceeds from disposal of property 12,242 26,294
--------- ---------
Net cash used in investing activities (216,912) (139,659)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt 38,216 9,545
Proceeds under revolving lines of credit
and long-term borrowings 91,730 287,731
Payments on revolving lines of credit
and long-term borrowings (67,532) (300,183)
Increase (decrease) in book overdrafts 69,147 (7,789)
Principal payments on capital leases (10,068) (11,133)
Proceeds from stock options exercised 40 -
Cash dividends (5,733) (5,733)
--------- ---------
Net cash provided by (used in) financing
activities 115,800 (27,562)
--------- ---------
Effect of exchange rate changes on
cash and short-term investments 328 485
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 18,254 (15,450)
Cash and Short-term Investments
at Beginning of Period 99,772 128,930
--------- ---------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 118,026 $ 113,480
========= =========
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 40 weeks ended November 30,
1996 and December 2, 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 40 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 40 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 November 30, 1996, a valuation allowance existed for the entire
amount of the net deferred tax assets relating to the Canadian
operations. During the 40 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
The increase in other assets is the result of notes receivable and
equipment leases relating to the Food Basics Franchise business.
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-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
12 WEEKS ENDED NOVEMBER 30, 1996
-------------------------------
OPERATING RESULTS
Sales for the third quarter ended November 30, 1996 of $2.3 billion
increased $25 million or 1.1% from last year. Contributing to this increase
is the opening of 32 stores in new market areas since the beginning of the
third quarter of fiscal 1995 which added approximately $55 million or 2.4%
to sales in the third quarter of fiscal 1996. In addition, the Company had
$61 million in wholesale sales relating to servicing 47 Food Basics
Franchise stores as of November 30, 1996. The 32 new market area stores
coupled with the wholesale sales, increased total Company sales by $116
million or 5% for the 12 weeks ended November 30, 1996. The closure of 110
stores, excluding replacement stores, since the beginning of the third
quarter of fiscal 1995, of which 33 have been converted to Food Basics
Franchise stores in Canada and 1 which will be converted to a Food Basics
Franchise store later in the year, reduced comparative sales by
approximately $96 million or 4.1% in the third quarter of 1996.
Total Company same store sales for the third quarter, including replacement
stores, increased by 0.3% from the prior year. Average weekly sales per
supermarket were approximately $195,600 versus $182,100 for the
corresponding period of the prior year for a 7.4% increase. Same store
sales for U.S. operations, which include replacement stores, increased 0.2%
from the prior year. In Canada, same store sales, which include replacement
stores, increased 0.9% from the prior year.
Gross margin as a percent of sales decreased 0.20% to 28.84% in the third
quarter of fiscal 1996 from 29.04% for the third quarter of fiscal 1995,
resulting primarily from decreased gross margin rates in Canada resulting
from the lower margins of the Food Basics Franchise business partially
offset by an increase in the retail supermarket margin. The gross margin
dollar increase of $3 million is primarily the result of an increase in
sales volume which had an impact of increasing margin by $7 million, partly
offset by a decrease in gross margin rates of $3 million and a decrease in
the Canadian exchange rate of $1 million. In the U.S., gross margin
increased $8 million, primarily resulting from an increase in gross margin
rates of $9 million partially offset by a decrease in sales volume which had
an impact of decreasing margin by $1 million. In Canada, gross margin
decreased $5 million, primarily resulting from the effect of a decrease in
gross margin rates of $12 million and a decrease in the Canadian exchange
rate of $1 million, partially offset by an increase in sales volume which
had an impact of increasing margin by $8 million. The $12 million gross
margin rate decrease in Canada is mainly the result of the lower margins
provided by the Food Basics Franchise business.
Store operating, general, and administrative expense as a percent of sales
decreased to 27.35% from 27.77% for the corresponding period in the prior
year resulting primarily from reduced store labor and occupancy costs in
Canada as a result of the Food Basics Franchise business.
Interest expense-net, decreased $0.4 million from the previous year,
primarily due to an increase in interest income of $0.2 million, coupled
with a $0.2 million decrease in interest expense resulting from decreases in
average rates and capital lease interest expense in both the U.S. and
Canada.
-6-
Income before income taxes for the 12 weeks ended November 30, 1996 was
$17.8 million compared to $12.3 million for the comparable period in the
prior year for an increase of approximately $5.5 million or 44.7%. The
increase is mainly the result of higher gross margin of $2.5 million, lower
store operating, general and administrative expenses of $2.6 million, and
lower net interest expense of $0.4 million.
The income tax provisions recorded for the 40 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 third quarter 1996 and 1995 provisions mainly reflect the taxes on the
U.S. income, as the Canadian income tax expense is principally offset by the
reversal of its income tax valuation allowance.
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS
40 WEEKS ENDED NOVEMBER 30, 1996
-------------------------------------
OPERATING RESULTS
Sales for the 40 weeks ended November 30, 1996 of $7.7 billion decreased $29
million or 0.4% from last year. Contributing to this decrease is that the
Company closed 167 stores since the beginning of fiscal 1995, of which 40
have been converted to Food Basics Franchise stores in Canada and 1 which
will be converted to a Food Basics Franchise store later in the year, and 8
which were sold in the Rhode Island market in the first quarter of fiscal
1995. The 167 store closures, excluding replacement stores, since the
beginning of fiscal 1995 reduced comparative sales by approximately $363
million or 4.6% in the first three quarters of fiscal 1996. The opening of
32 stores in new market areas since the beginning of fiscal 1995 added
approximately $205 million or 2.7% to sales in the first three quarters of
fiscal 1996. In addition, the Company had $136 million in wholesale sales
relating to servicing 47 Food Basics Franchise stores as of November 30,
1996. The 32 new market area stores coupled with the wholesale sales,
increased total Company sales by $341 million or 4.4% for the 40 weeks ended
November 30, 1996.
Total Company same store sales, including replacement stores, for the 40
week period decreased 0.1% from the prior year. Average weekly sales per
supermarket were approximately $194,500 versus $181,500 for the same period
of the prior year for a 7.2% increase. Year to date sales for U.S.
operations have declined, with same store sales, which include replacement
stores, down 0.1% from the prior year. In Canada, year to date sales have
decreased, with same store sales, including replacement stores, up 0.2% from
the prior year.
Gross margin as a percent of sales decreased 0.11% to 28.78% from 28.89% for
the prior year resulting primarily from decreased gross margin rates in
Canada resulting from the Food Basics Franchise business partially offset by
an increase in the retail supermarket margin. The gross margin dollar
decrease of $17 million is primarily the result of a decrease in sales
volume which had an impact of decreasing margin by $9 million, lower gross
margin rates of $5 million, and a lower Canadian exchange rate resulting in
a decrease of $3 million. In the U.S., gross margin increased $13 million,
primarily resulting from increased gross margin rates of $29 million,
partially offset by a decrease in sales volume which had an impact of
decreasing margin by $16 million. In Canada, gross margin decreased $30
million, primarily resulting from a decrease in gross margin rates of $34
million and a lower Canadian exchange rate resulting in a decrease of $3
million, partially offset by an increase in sales volume which had an impact
of increasing margin by $7 million. The $34 million gross margin rate
decrease in Canada is mainly the result of the lower margins provided by the
Food Basics Franchise business.
Store operating, general and adminstrative expense as a percent of sales
decreased to 27.21% from 27.53% for the prior year resulting primarily from
reduced store labor and occupancy costs in Canada as a result of the Food
Basics Franchise business.
Interest expense-net, decreased $2.5 million from the previous year
primarily due to an increase in interest income of $1.2 million, coupled
with a $1.3 million decrease in interest expense resulting from decreases in
average rates and capital lease interest expense in both the U.S. and
Canada.
-8-
Income before income taxes for the 40 week period ended November 30, 1996
was $68.9 million compared to $50.7 million for the comparable period of the
prior year for an increase of approximately $18.2 million or 35.9%. The
increase is mainly the result of lower store operating, general and
administrative expenses of $33.0 million and lower net interest expense of
$2.5 million, partially offset by lower gross margin of $17.3 million.
The income tax provisions recorded in the first 40 week period of fiscal
1996 and 1995 reflects the Company's estimated expected annual tax rates
applied to their respective domestic and foreign financial results. The
first, second and third quarter 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 third quarter with working capital of $214 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 third 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 November 30, 1996, the Company had approximately $418
million available in credit facilities of which $344 million were committed
facilities.
The Company's loan agreements and certain of its notes contain various
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 November 30, 1996.
For the 40 weeks ended November 30, 1996, capital expenditures totaled $229
million, which included 27 new stores and 60 remodels and enlargements. The
Company expects to have capital expenditures of approximately $70 million in
the fourth quarter of fiscal 1996.
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 1996.
-9-
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
--------------------------------
None
-10-
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 13, 1997 By: /s/ Kenneth A. Uhl
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
-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: January 13, 1997 By:
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
-11-
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GREAT
ATLANTIC & PACIFIC TEA COMPANY, INC. 10-Q FOR THE THIRD QUARTER ENDED NOVEMBER
30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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