Conformed Copy
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 14, 1997 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 June 14, 1997
----- ----------------------------
Common stock - $1 par value 38,248,966 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)
16 Weeks Ended
June 14, June 15,
1997 1996
---------- ----------
Sales $3,104,591 $3,092,554
Cost of merchandise sold (2,220,375) (2,195,774)
---------- ----------
Gross margin 884,216 896,780
Store operating, general and
administrative expense (831,210) (844,037)
---------- ----------
Income from operations 53,006 52,743
Interest expense, net (22,153) (20,771)
---------- ----------
Income before income taxes 30,853 31,972
Provision for income taxes (8,066) (10,093)
---------- ----------
Net income 22,787 21,879
Retained earnings at
beginning of period 447,768 382,380
Cash dividends (3,825) (1,911)
---------- ----------
Retained earnings at
end of period $ 466,730 $ 402,348
========== ==========
Earnings per share:
Net income $ .60 $ .57
========== ==========
Cash dividends $ .10 $ .05
========== ==========
Weighted average number of
common and common equivalent
shares outstanding 38,252,722 38,295,144
========== ==========
See Notes to Quarterly Report on Page 5.
- 1 -
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
June 14, 1997 Feb. 22, 1997
------------- -------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and short-term investments $ 173,894 $ 98,830
Accounts receivable 225,611 213,888
Inventories 899,008 881,288
Prepaid expenses and other assets 45,462 37,373
---------- ----------
Total current assets 1,343,975 1,231,379
---------- ----------
Property:
Property owned 1,496,599 1,486,504
Property leased 99,782 103,474
---------- ----------
Property-net 1,596,381 1,589,978
Other assets 174,515 181,315
---------- ----------
Total Assets $3,114,871 $3,002,672
========== ==========
See Notes to Quarterly Report on Page 5.
-2-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
June 14, 1997 Feb. 22, 1997
-------------- -------------
(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Current liabilities:
Current portion of long-term debt $ 8,690 $ 18,290
Current portion of obligations under
capital leases 12,706 12,708
Accounts payable 494,361 468,808
Book overdrafts 152,103 182,305
Accrued salaries, wages and benefits 143,073 146,737
Accrued taxes 61,561 52,269
Other accruals 136,997 134,888
---------- ----------
Total current liabilities 1,009,491 1,016,005
---------- ----------
Long-term debt 804,020 701,609
---------- ----------
Obligations under capital leases 133,369 137,886
---------- ----------
Deferred income taxes 113,106 113,188
---------- ----------
Other non-current liabilities 146,449 143,912
---------- ----------
Commitments & contingencies
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
38,248,966 and 38,247,716,
respectively 38,249 38,247
Capital surplus 453,784 453,751
Cumulative translation adjustment (50,327) (49,694)
Retained earnings 466,730 447,768
---------- ----------
Total shareholders' equity 908,436 890,072
---------- ----------
Total liabilities and shareholders'
equity $3,114,871 $3,002,672
========== ==========
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)
16 Weeks Ended
June 14, 1997 June 15, 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,787 $ 21,879
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 71,439 69,558
Deferred income tax provision 5,541 5,989
Loss on disposal of owned property 1,013 52
(Increase)decrease in receivables (6,272) 11,610
Increase in inventories (19,281) (18,579)
Increase in prepaid expenses and
other current assets (13,775) (7,417)
(Increase) decrease in other assets 640 (8,936)
Increase in accounts payable 26,460 42,402
Decrease in accrued salaries,
wages and benefits (3,329) (1,873)
Increase in accrued taxes 9,324 4,156
Increase (decrease)in other accruals
and other liabilities 7,158 (2,858)
Other operating activities, net 127 99
--------- ---------
Net cash provided by operating activities 101,832 116,082
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (83,221) (93,233)
Proceeds from disposal of property 1,823 8,815
--------- ---------
Net cash used in investing activities (81,398) (84,418)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt (101,516) 10,577
Proceeds under revolving lines of
credit and long-term borrowings 305,696 6,646
Payments on revolving lines of
credit and long-term borrowings (109,714) (23,575)
Increase(decrease)in book overdrafts (29,654) 4,117
Principal payments on capital leases (3,825) (4,034)
Deferred financing fees (2,434) -
Cash dividends (3,825) (1,911)
Proceeds from stock options exercised 35 -
--------- ---------
Net cash provided by (used in)
financing activities 54,763 (8,180)
--------- ---------
Effect of exchange rate changes on
cash and short-term investments (133) 144
--------- ---------
NET INCREASE IN CASH AND
SHORT-TERM INVESTMENTS 75,064 23,628
Cash and Short-Term Investments
at Beginning of Period 98,830 99,772
--------- ---------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 173,894 $ 123,400
========= =========
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 16 weeks ended June 14,
1997 and June 15, 1996 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 1996 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 in the first quarter of fiscal years
1997 and 1996 reflect the Company's estimated expected annual tax rates
applied to their respective domestic and foreign financial results. The
first quarter 1997 and 1996 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 deferred tax asset valuation allowance.
During the first quarter of fiscal 1997 and 1996 the Canadian operations
generated pretax earnings and reversed a portion of the valuation
allowance to the extent of such pretax earnings. 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.
Accordingly, at June 14, 1997 the Company is continuing to fully reserve
its Canadian net deferred tax assets. The valuation allowance will be
adjusted when and if, in the opinion of Management, significant positive
evidence exists which indicates that it is more likely than not that the
Company will be able to realize its Canadian deferred tax assets.
3) OTHER ASSETS
Other assets include notes receivable and equipment leases relating to
the Food Basics franchising business amounting to approximately $38.7
million and $40.2 million at June 14, 1997 and February 22, 1997,
respectively.
4) DEBT
On April 15, 1997, the Company issued $300 million 7.75% 10 year Notes
due April 15, 2007. The Company used the net proceeds to reduce bank
borrowings under the U.S. and Canadian revolving credit facilities,
prepay other indebtedness and for general corporate purposes.
On June 12, 1997, the Company offered to exchange its 7.75% 10 year Notes
due April 15, 2007, which were registered under the Securities Act, for
outstanding 7.75% 10 year Notes due April 15, 2007, which had not been so
registered. The exchange offer expired on July 10, 1997 with all
outstanding unregistered 10 year Notes being exchanged for registered 10
year Notes.
On June 10, 1997, the Company executed an unsecured five year $465
million U.S. credit agreement and a five year C$50 million Canadian
credit agreement (the " 1997 Credit Agreement") with a syndicate of
banks, enabling it to borrow funds on a revolving basis sufficient to
refinance short-term borrowings. This 1997 Credit Agreement replaced a
previous five year $400 million U.S. revolving credit agreement and a
C$100 million revolving credit agreement dated December 12, 1995. The
1997 Credit Agreement resulted in the Company obtaining lower cost of
borrowing, reduced facility fees, and extended the maturity to June 2002.
The Company currently intends to borrow up to $200 million against the
1997 Credit Agreement in order to repay at maturity $200 million in bonds
due on January 15, 1998.
5) NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 " Earnings Per Share"
("SFAS 128"). SFAS 128 replaces the presentation of primary earnings per
share ("EPS") with a presentation of basics EPS. The Company will adopt
SFAS 128 during the fourth quarter of fiscal 1997 and believes that the
computation of basics EPS will not result in a difference from primary
EPS as currently computed.
6) SUBSEQUENT EVENT
On June 23, 1997, the Company executed an agreement to sell 11 stores in
North Carolina and South Carolina to a supermarket chain in the
Southeast. This transaction is expected to close in the third quarter of
fiscal 1997.
-5-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
16 WEEKS ENDED JUNE 14, 1997
----------------------------
OPERATING RESULTS
Sales for the first quarter ended June 14, 1997 of $3.1 billion increased
$12 million or 0.4% from the prior year first quarter. Contributing to this
increase is the opening of 23 stores in new market areas since the beginning
of fiscal 1996 which added approximately $73 million or 2.4% to sales in the
first quarter of fiscal 1997. In addition, wholesale sales to the Food
Basics franchised stores increased $65 million or 188% to $100 million for
the 16 weeks ended June 14, 1997, which increased total Company sales by
2.1%. These increases were partially offset by store closures and same
store sales. The closure of 74 stores, excluding replacement stores, since
the beginning of fiscal 1996, reduced comparative sales by approximately $76
million or 2.5% in the first quarter of fiscal 1997. In addition, same
store sales ("same store sales" referred to herein includes replacement
stores) decreased 1.6% or $50 million from the same period last year.
Average weekly sales per supermarket were approximately $197,000 versus
$192,300 for the corresponding period of the prior year for a 2.4% increase.
Same store sales for U.S. operations declined 1.7% from the prior year and
for the Canadian operations same store sales decreased 1.1% from the prior
year.
Gross margin as a percent of sales decreased .52% to 28.48% in the first
quarter of fiscal 1997 from 29.00% for the first quarter of fiscal 1996,
resulting primarily from the impact of the increase in the lower margin
wholesale sales to the Food Basics franchised stores. The wholesale sales
to the franchised stores represented 3.2% of total Company sales in the
first quarter of 1997 as opposed to only 1.1% of total Company sales in the
prior year first quarter. Excluding the effect of the wholesale sales to
the franchised stores, the gross margin percentage increased .06% from the
prior year to 29.35%. The gross margin dollar decrease of $13 million is
primarily the result of the increased wholesale sales which have a lower
margin than the retail sales. The lower margin wholesale sales resulted in
a decrease in gross margin rates of $16 million which was partially offset
by the wholesales sales volume increase which impacted margins by $5
million. A lower Canadian exchange rate resulted in decreasing gross margin
by $2 million. The Canadian operations gross margin decreased $10 million
which was primarily the result of the wholesale sales increase from the
prior year. The U.S. gross margin decreased $3 million principally as a
result of a decrease in sales volume which had an impact of decreasing
margin by $5 million.
Store operating, general, and administrative expense as a percent of sales
decreased .52% to 26.77% from 27.29% for the prior year resulting primarily
from the Food Basics franchise business. The Food Basics franchise business
maintained expenses relatively flat while sales increased $65 million.
Interest expense, net increased $1.4 million from the previous year,
primarily due to an increase in debt of approximately $93 million. The
increase in interest expense was partially offset by an increase in interest
income of $1.5 million from the prior year first quarter. This increase was
the result of higher interest income on the equipment leases relating to the
Food Basics franchise business and higher interest income on short-term
investments.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Income before income taxes for the first quarter ended June 14, 1997 was
$30.9 million compared to $32 million for the comparable period in the prior
year for a decrease of approximately $1.1 million or 3.5%. The decrease is
mainly the result of lower gross margin of $12.6 million and higher interest
expense of $1.4 million, partially offset by lower store operating, general
and administrative expenses of $12.9 million.
The income tax provisions recorded in the first quarter of fiscal years 1997
and 1996 reflects the Company's estimated expected annual tax rates applied
to their respective domestic and foreign financial results. The effective
tax rate for the first quarter of fiscal 1997 was 26.1% versus an effective
tax rate of 31.6% for the first quarter of fiscal 1996. The decrease in the
effective tax rate is the result of the higher earnings provided by the
Canadian operations. The first quarter 1997 and 1996 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 deferred tax asset valuation
allowance. During the first quarter of fiscal 1997 and 1996 the Canadian
operations generated pretax earnings and reversed a portion of the valuation
allowance to the extent of such pretax earnings. 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. Accordingly,
at June 14, 1997 the Company is continuing to fully reserve its Canadian net
deferred tax assets. The valuation allowance will be adjusted when and if,
in the opinion of Management, significant positive evidence exists which
indicates that it is more likely than not that the Company will be able to
realize its Canadian deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the first quarter with working capital of $334 million
compared to $215 million at the beginning of the fiscal year. The Company
had cash and short-term investments aggregating $174 million at the end of
the first quarter of fiscal 1997 compared to $99 million as of fiscal 1996
year end. Short-term investments were approximately $56 million and $0.1
million at June 14, 1997 and February 22, 1997, respectively, and were
primarily invested in commercial paper.
On April 15, 1997, the Company issued $300 million 7.75% 10 year Notes due
April 15, 2007. The Company used the net proceeds to reduce bank borrowings
under the U.S. and Canadian revolving credit facilities, prepay other
indebtedness and for general corporate purposes.
On June 12, 1997, the Company offered to exchange its 7.75% 10 year Notes
due April 15, 2007, which were registered under the Securities Act, for
outstanding 7.75% 10 year Notes due April 15, 2007, which had not been so
registered. The exchange offer expired on July 10, 1997 with all
outstanding unregistered 10 year Notes being exchanged for registered 10
year Notes.
-8-
On June 10, 1997, the Company executed an unsecured five year $465 million
U.S. credit agreement and a five year C$50 million Canadian credit agreement
(the "1997 Credit Agreement") with a syndicate of banks, enabling it to
borrow funds on a revolving basis sufficient to refinance short-term
borrowings. This 1997 Credit Agreement replaced a previous five year $400
million U.S. revolving credit agreement and a C$100 million revolving credit
agreement dated December 12, 1995. The 1997 Credit Agreement resulted in
the Company obtaining lower cost of borrowing, reduced facility fees, and
extended the maturity to June 2002.
In addition to the 1997 Credit Agreement, the Company also has various
uncommitted lines of credit with numerous banks. As of June 14, 1997, the
Company had no borrowings outstanding on the 1997 Credit Agreement or on the
uncommitted lines of credit. Accordingly, as of June 14, 1997, the Company
had available approximately $500 million on the 1997 Credit Agreement and
various amounts in uncommitted lines of credit. The Company currently
intends to borrow up to $200 million against the 1997 Credit Agreement in
order to repay at maturity $200 million in bonds due on January 15, 1998.
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 June 14, 1997.
On March 18, 1997, the Board of Directors increased the Company's quarterly
dividend from $0.05 to $0.10 per share which increased the dividend payment
from $1.9 million in the first quarter of fiscal 1996 to $3.8 million in the
first quarter of fiscal 1997.
On April 14, 1997, Standard & Poor's Ratings Group upgraded the Company's
rating to BBB- from it's previous rating of BB+. This upgrade brought the
Standard & Poor's rating in line with the Company's existing senior debt
rating of Baa3 with Moody's Investor's Service. A further change in either
of these ratings could affect the availability and cost of financing.
For the 16 weeks ended June 14, 1997, capital expenditures totaled $83
million, which included 9 new stores and 20 remodels and enlargements.
Currently, the Company expects to achieve its fiscal 1997 budgeted capital
expenditures of approximately $310 million. Accordingly, the Company
expects to have capital expenditures of approximately $227 million
throughout the remainder of fiscal 1997.
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 1997.
-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
---------------------------------------------------
At its annual meeting of Shareholders, held on July 15, 1997, there
were 35,024,173 shares or 91.6% of the 38,248,966 shares
outstanding and entitled to vote represented either in person or by
proxy.
The 11 Board of Directors nominated to serve for a one-year term
were all elected, with each receiving an affirmative vote of at
least 98.9% of the shares present. Deloitte & Touche LLP was re-
elected as the Company's independent auditor by at least 99.8% of
the shares present.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
On June 12, 1997, Form 8-K was filed with the Securities and
Exchange Commission with regard to the Competitive Advance and
Revolving Credit Facilities Agreement dated as of June 10, 1997
between The Great Atlantic & Pacific Tea Company, Inc. and The
Great Atlantic & Pacific Company of Canada, Limited as borrowers
and a syndicate of banks.
-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: July 23, 1997 By: /s/ Kenneth A. Uhl
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GREAT
ATLANTIC AND PACIFIC TEA COMPANY, INC. 10-Q FOR THE FIRST QUARTER ENDED JUNE 14,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> JUN-14-1997
<CASH> 173894
<SECURITIES> 0
<RECEIVABLES> 225611
<ALLOWANCES> 0
<INVENTORY> 899008
<CURRENT-ASSETS> 1343975
<PP&E> 1596381
<DEPRECIATION> 0
<TOTAL-ASSETS> 3114871
<CURRENT-LIABILITIES> 1009491
<BONDS> 937389
0
0
<COMMON> 38249
<OTHER-SE> 870187
<TOTAL-LIABILITY-AND-EQUITY> 3114871
<SALES> 3104591
<TOTAL-REVENUES> 3104591
<CGS> (2220375)
<TOTAL-COSTS> (2220375)
<OTHER-EXPENSES> (831210)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (22153)
<INCOME-PRETAX> 30583
<INCOME-TAX> (8066)
<INCOME-CONTINUING> 22787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22787
<EPS-PRIMARY> .60
<EPS-DILUTED> .60
</TABLE>
