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 November 29, 1997 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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- ----------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES XXX NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 29, 1997
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Common stock - $1 par value 38,250,966 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)
12 Weeks Ended 40 Weeks Ended
November 29, November 30,November 29, November 30,
1997 1996 1997 1996
----------- ----------- ----------- ------------
Sales $2,318,821 $2,318,762 $7,759,107 $7,741,303
Cost of merchandise sold (1,655,094) (1,650,098) (5,537,697) (5,513,504)
---------- ---------- ---------- ----------
Gross margin 663,727 668,664 2,221,410 2,227,799
Store operating, general and
administrative expense (632,974) (634,266) (2,099,011) (2,106,105)
---------- ---------- ---------- ----------
Income from operations 30,753 34,398 122,399 121,694
Interest expense, net (17,144) (16,557) (56,185) (52,804)
---------- ---------- ---------- ----------
Income before income taxes 13,609 17,841 66,214 68,890
Provision for income taxes (2,375) (3,750) (15,986) (18,926)
---------- ---------- ---------- ----------
Income before extraordinary
item 11,234 14,091 50,228 49,964
Extraordinary loss on early
extinguishment of debt
(net of income tax benefit
of $394) - - (544) -
---------- ---------- ---------- ----------
Net Income 11,234 14,091 49,684 49,964
Retained earnings at
beginning of period 478,568 414,431 447,768 382,380
Cash dividends (3,825) (1,911) (11,475) (5,733)
---------- ---------- ---------- ----------
Retained earnings at
end of period $ 485,977 $ 426,611 $ 485,977 $ 426,611
========== ========== ========== ==========
Earnings per share:
Income before extra-
ordinary item $ .29 $ .37 $ 1.31 $ 1.31
Extraordinary loss on early
extinguishment of debt .00 .00 (.01) .00
---------- ---------- ---------- ----------
Net Income $ .29 $ .37 $ 1.30 $ 1.31
========== ========== ========== ==========
Cash dividends $ .10 $ .05 $ .30 $ .15
========== ========== ========== ==========
Weighted average number of
common and common
equivalent shares
outstanding 38,337,104 38,267,453 38,259,069 38,278,049
========== ========== ========== ==========
See Notes to Quarterly Report on Page 5.
- 1 -
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
Nov. 29, 1997 Feb. 22, 1997
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(Unaudited)
ASSETS
- ------
Current assets:
Cash and short-term investments $ 172,498 $ 98,830
Accounts receivable 242,943 213,888
Inventories 936,576 881,288
Prepaid expenses and other assets 36,176 37,373
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Total current assets 1,388,193 1,231,379
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Property:
Property owned 1,501,225 1,486,504
Property leased 93,964 103,474
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Property-net 1,595,189 1,589,978
Other assets 177,131 181,315
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Total Assets $3,160,513 $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)
Nov. 29, 1997 Feb. 22, 1997
-------------- -------------
(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Current liabilities:
Current portion of long-term debt $ 5,380 $ 18,290
Current portion of obligations under
capital leases 12,658 12,708
Accounts payable 488,631 468,808
Book overdrafts 192,974 182,305
Accrued salaries, wages and benefits 139,389 146,737
Accrued taxes 60,630 52,269
Other accruals 126,516 134,888
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Total current liabilities 1,026,178 1,016,005
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Long-term debt 813,216 701,609
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Obligations under capital leases 126,122 137,886
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Deferred income taxes 118,758 113,188
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Other non-current liabilities 154,053 143,912
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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
38,250,966 and 38,247,716,
respectively 38,251 38,247
Capital surplus 453,840 453,751
Cumulative translation adjustment (55,882) (49,694)
Retained earnings 485,977 447,768
---------- ----------
Total shareholders' equity 922,186 890,072
---------- ----------
Total liabilities and shareholders'
equity $3,160,513 $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)
40 Weeks Ended
Nov. 29,1997 Nov. 30, 1996
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 49,684 $ 49,964
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 179,165 176,737
Deferred income tax provision (benefit) 7,047 (9,115)
(Gain) loss on disposal of owned property (7,666) 908
Increase in receivables (24,853) (574)
Increase in inventories (60,826) (82,508)
(Increase) decrease in prepaid expenses
and other current assets (575) 4,721
Increase in other assets (5,872) (27,583)
Increase in accounts payable 23,113 21,283
Increase (decrease) in accrued salaries,
wages and benefits (6,229) 7,579
Increase (decrease) in accrued taxes 8,556 (4,944)
Increase (decrease) in other accruals
and other liabilities 8,956 (16,817)
Other operating activities, net (1,525) (613)
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Net cash provided by operating activities 168,975 119,038
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (204,104) (229,154)
Proceeds from disposal of property 17,840 12,242
--------- ---------
Net cash used in investing activities (186,264) (216,912)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt (38,000) 46,000
Proceeds under revolving lines of credit 647,148 341,392
Payments on revolving lines of credit (781,296) (326,011)
Proceeds from long-term borrowings 301,309 4,978
Payments on long-term borrowings (26,286) (3,945)
Increase in book overdrafts 13,177 69,147
Principal payments on capital leases (9,522) (10,068)
Deferred financing fees (2,532) -
Cash dividends (11,475) (5,733)
Proceeds from stock options exercised 93 40
--------- ---------
Net cash provided by financing activities 92,616 115,800
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Effect of exchange rate changes on
cash and short-term investments (1,659) 328
--------- ---------
NET INCREASE IN CASH AND
SHORT-TERM INVESTMENTS 73,668 18,254
Cash and Short-Term Investments
at Beginning of Period 98,830 99,772
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CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 172,498 $ 118,026
========= =========
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 29,
1997 and November 30, 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 for the 40 week period ended in fiscal
years 1997 and 1996 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 1997 and 1996, 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. During the 40 week period ended in fiscal years 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 is unable to
conclude that the Canadian deferred tax assets are more likely than not
to be realized. Accordingly, at November 29, 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.
-5-
3) FOOD BASICS FRANCHISING
As of November 29, 1997, the Company served 52 Food Basics franchised
stores. These franchisees are required to purchase inventory exclusively
from the Company which acts as a wholesaler to the franchisees. In
addition, the Company subleases the store and leases the equipment in the
stores to the franchisees. The Company also provides merchandising,
advertising, accounting and other consultative services to the
franchisees for which it receives a nominal fee which mainly represents
the reimbursement of costs incurred to provide such services.
Included in the financial statements are notes receivable and equipment
leases relating to the Food Basics franchising business amounting to
approximately $38.5 million and $42.7 million, net of an allowance for
doubtful accounts, at November 29, 1997 and February 22, 1997,
respectively. The notes receivables are collateralized by the inventory
in the stores while the equipment lease receivable is collateralized by
the equipment in the stores. The current portion of the receivables of
$1 million and $2.4 million is recorded in accounts receivable while the
non-current portion of $37.5 million and $40.3 million is recorded in
other assets at November 29, 1997 and February 22, 1997, respectively.
The repayment of the inventory notes and equipment leases are dependent
on positive operating results of the stores. To the extent that
franchisees incur operating losses, the Company establishes an allowance
for doubtful accounts. The Company continually assesses the sufficiency
of the allowance on a store by store basis based upon the operating
losses incurred and the related collateral underlying the amounts due
from the franchisees. In the event of default by a franchisee, the
Company reserves the option to reacquire the inventory and equipment at
the store and operate the franchise as a corporate owned store.
4) EXTRAORDINARY ITEM
During the second quarter of fiscal 1997, the Company retired at a
premium, mortgages amounting to $20 million with an effective interest
rate of 9.44%.
5) 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.
-6-
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.
The Company has a cross-currency swap relating to the $75 million 7.78%
notes due November 1, 2000. The cross-currency swap enables the Company
to pay in Canadian dollars a fixed rate of interest of 9.23% on a
notional amount of C$100 million for the $75 million 7.78% notes
denominated in U.S. dollars. The cost of the cross-currency swap of
1.45% is charged to interest expense. The incremental interest expense
due to the counterparty is paid in exchange for protection against the
effect of a decrease in Canadian exchange rates on both the semi-annual
interest payments and the final principal payment due to the Company's
U.S. bondholders. Consequently, the Company records an asset or
liability to the extent that an eventual transaction gain or loss is
expected to be recorded upon the settlement of the notional amount of the
underlying debt. Accordingly, the Company has recorded in other assets
the receivable due from the counterparty amounting to approximately $4.5
million and $1.4 million, as of November 29, 1997 and February 22, 1997,
respectively.
On April 15, 1997, the Company's Canadian subsidiary entered into an
interest rate swap agreement with a notional amount of C$100 million
where the Company receives a fixed rate of interest and pays a variable
rate of interest.
6) NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings Per Share" ("SFAS 128"). SFAS 128 replaces the presentation of
primary earnings per share ("EPS") with a presentation of basic EPS. The
Company will adopt SFAS 128 during the fourth quarter of fiscal 1997 and
believes that the computation of basic EPS will not result in a
difference from primary EPS as currently computed.
-7-
In addition, in June 1997 the FASB issued SFAS No. 129 "Disclosure of
Information about Capital Structure" ("SFAS 129"), SFAS No. 130
"Reporting Comprehensive Income" ("SFAS 130") and SFAS No. 131
"Disclosure about Segments of an Enterprise and Related Information"
("SFAS 131"). The Company has determined that SFAS 129 will not require
any changes to the financial statements. SFAS 130 relates to the change
in the equity of a business during a reporting period from transactions
of the business. The Company currently intends to adopt this new
accounting standard effective in the first quarter of fiscal 1998. The
expected impact in the adoption of SFAS 130 is not readily determinable
as the impact is predicated on the future changes in the Canadian
exchange rate. SFAS 131 supersedes SFAS No. 14 "Financial Reporting for
Segments of a Business Enterprise". SFAS 131 provides for the disclosure
of financial information disaggregated by the way management organizes
the segments of the enterprise for making operating decisions. SFAS 131
will impact the financial statements to the extent that it is necessary
to provide additional disclosure about the Company's segments. The
Company will adopt SFAS 131 in fiscal 1998.
-8-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
12 WEEKS ENDED NOVEMBER 29, 1997
--------------------------------
OPERATING RESULTS
Sales for the third quarter ended November 29, 1997 of $2.3 billion remained
flat from the prior year third quarter. The opening of 23 stores in new
market areas since the third quarter of fiscal 1996 added approximately $76
million or 3.2% to sales in the third quarter of fiscal 1997. In addition,
wholesale sales to the Food Basics franchised stores increased $19 million
or 31% to $80 million for the 12 week period ended November 29, 1997, which
increased total Company sales by 0.8%. These increases were offset by the
closure of 61 stores, excluding replacement stores, since the beginning of
the third quarter of fiscal 1996, of which 11 have been sold in the Carolina
market, which reduced total sales by approximately $54 million or 2.3% in
the third quarter of fiscal 1997. In addition, same store sales ("same
store sales" referred to herein includes replacement stores) decreased 1.3%
or $33 million from the same period last year.
Average weekly sales per supermarket were approximately $200,100 versus
$195,600 for the corresponding period of the prior year for a 2.3% increase.
Same store sales for Canadian operations increased 1.7% from the prior year
while same store sales for U.S. operations declined 1.9% from the prior
year.
Gross margin as a percent of sales decreased .22% to 28.62% in the third
quarter of fiscal 1997 from 28.84% for the third quarter of fiscal 1996,
resulting primarily from the higher volume of the lower margin wholesale
sales to the Food Basics franchised stores. The wholesale sales to the
franchised stores represented 3.4% of total Company sales in the third
quarter of 1997 as opposed to only 2.6% of total Company sales in the prior
year third quarter. Excluding the effect of the wholesale sales to the
franchised stores, the gross margin percentage increased .03% from the prior
year to 29.55%. The gross margin dollar decrease of $5 million is primarily
the result of a decrease in gross margin rates of $6 million and a lower
Canadian exchange rate which decreased margin by $4 million, partially
offset by an increase in sales volume which had an impact of increasing
margin by $5 million. The U.S. gross margin decreased $5 million primarily
as a result of a decrease in sales volume which had an impact of decreasing
margin.
Store operating, general, and administrative expense as a percent of sales
decreased .05% to 27.30% from 27.35% for the corresponding period in the
prior year resulting primarily from the effect of the Food Basics franchise
business coupled with a gain on the sale of a non-operating warehouse.
These decreases were partially offset by an increase in store labor and
occupancy costs in the U.S.
-9-
Net interest expense increased $0.6 million from the previous year,
primarily due to an increase in average debt of approximately $38 million.
The increase in interest expense was partially offset by an increase in
interest income of $1.1 million from the prior year third 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.
-10-
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 third quarter ended November 29, 1997 was
$13.6 million compared to $17.8 million for the comparable period in the
prior year for a decrease of approximately $4.2 million or 24%. The
decrease is mainly the result of lower gross margin of $4.9 million and
higher net interest expense of $0.6 million, partially offset by lower store
operating, general and administrative expenses of $1.3 million.
The income tax provisions recorded in the third 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 effective
tax rate for the third quarter of fiscal 1997 was 17.5% versus an effective
tax rate of 21.0% for the third quarter of fiscal 1996. The decrease in the
effective tax rate is the result of the higher earnings provided by the
Canadian operations. The third 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 third 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 is unable to conclude that the Canadian
deferred tax assets are more likely than not to be realized. Accordingly,
at November 29, 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.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS
40 WEEKS ENDED NOVEMBER 29, 1997
--------------------------------
OPERATING RESULTS
Sales for the 40 weeks ended November 29, 1997 of $7.8 billion increased $18
million or 0.2% from the prior year. Contributing to this increase is the
opening of 33 stores in new market areas since the beginning of fiscal 1996
which added approximately $222 million or 2.9% to sales in the 40 week
period of fiscal 1997. In addition, wholesale sales to the Food Basics
franchised stores increased $115 million or 84% to $252 million for the 40
week period ended November 29, 1997, which increased total Company sales by
1.5%. These increases were partially offset by the closure of 107 stores,
excluding replacement stores, since the beginning of fiscal 1996, of which
11 have been sold in the Carolina market, which reduced total sales by
approximately $179 million or 2.3% in the 40 week period of fiscal 1997. In
addition, same store sales decreased 1.8% or $133 million from the same
period last year.
Average weekly sales per supermarket were approximately $198,800 versus
$194,500 for the corresponding period of the prior year for a 2.2% increase.
Same store sales for U.S. operations declined 2.0% from the prior year and
Canadian operations same store sales decreased 0.4% from the prior year.
Gross margin as a percent of sales decreased .15% to 28.63% from 28.78% for
the prior year resulting primarily from the higher volume of the lower
margin wholesale sales to the Food Basics franchised stores, partially
offset by an increase in the retail supermarket margin in the U.S. The
wholesale sales to the franchised stores represented 3.2% of total Company
sales for the first three quarters of fiscal 1997 as opposed to only 1.8% of
total Company sales in the prior year. Excluding the effect of the
wholesale sales to the franchised stores, the gross margin percentage
increased .28% from the prior year to 29.52%. The gross margin dollar
decrease of $6 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 $13 million
which was offset by the wholesale sales volume increase which impacted
margins by $13 million. A lower Canadian exchange rate resulted in
decreasing margin by $6 million. The Canadian operations gross margin
decreased $17 million which was primarily the result of the wholesale sales
increase from the prior year. The U.S. gross margin increased $11 million
principally as a result of an increase in gross margin rates of $25 million
partially offset by a decrease in sales volume which had an impact of
decreasing margin by $14 million.
Store operating, general and administrative expense as a percent of sales
decreased .16% to 27.05% from 27.21% for the prior year resulting primarily
from the Food Basics franchise business which decreased expenses while sales
increased $115 million. This decrease was partially offset by an increase
in store labor and occupancy costs in the U.S.
-12-
Net interest expense increased $3.4 million from the previous year,
primarily due to an increase in average debt of approximately $71 million.
The increase in interest expense was partially offset by an increase in
interest income of $3.7 million from the corresponding period of the prior
year. 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.
Income before income taxes for the 40 week period ended November 29, 1997
was $66.2 million compared to $68.9 million for the comparable period of the
prior year for a decrease of approximately $2.7 million or 3.9%. The
decrease is mainly the result of lower gross margin of $6.4 million and
higher net interest expense of $3.4 million, partially offset by lower store
operating, general and administrative expenses of $7.1 million.
The income tax provisions recorded for the 40 week period 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
effective tax rate for the 40 week period ended November 29, 1997 was 24.1%
versus an effective tax rate of 27.5% for the corresponding period of the
prior year. The decrease in the effective tax rate is the result of higher
earnings provided by the Canadian operations. The first, second and third
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,
second and third quarters 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 is unable to conclude that the Canadian deferred tax
assets are more likely than not to be realized. Accordingly, at November
29, 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 third quarter with working capital of $362 million
compared to $215 million at the beginning of the fiscal year. The Company
had cash and short-term investments aggregating $172 million at the end of
the third quarter of fiscal 1997 compared to $99 million as of fiscal 1996
year end. Short-term investments were approximately $42 million and $0.1
million at November 29, 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.
-13-
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.
In addition to the 1997 Credit Agreement, the Company also has various
uncommitted lines of credit with numerous banks. As of November 29, 1997,
the Company had $34 million in borrowings outstanding on the 1997 Credit
Agreement. Accordingly, as of November 29, 1997, the Company had available
approximately $469 million on the 1997 Credit Agreement and $30 million 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 has a cross-currency swap relating to the $75 million 7.78%
notes due November 1, 2000. The cross-currency swap enables the Company to
pay in Canadian dollars a fixed rate of interest of 9.23% on a notional
amount of C$100 million for the $75 million 7.78% notes denominated in U.S.
dollars. The cost of the cross-currency swap of 1.45% is charged to
interest expense.
On April 15, 1997, the Company's Canadian subsidiary entered into an
interest rate swap agreement with a notional amount of C$100 million where
the Company receives a fixed rate of interest and pays a variable rate of
interest.
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 November 29, 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 $5.7 million for the 40 weeks ended November 30, 1996 to $11.5 million
for the 40 weeks ended November 29, 1997.
During the second quarter of fiscal 1997, the Company retired at a premium,
mortgages amounting to $20 million with an effective interest rate of 9.44%.
-14-
For the 40 weeks ended November 29, 1997, capital expenditures totaled $204
million, which included 30 new stores, 4 new franchised stores and 36
remodels and enlargements. The Company expects to have capital expenditures
of approximately $90 million for 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.
-15-
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
-16-
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 12, 1998 By: /s/ Kenneth A. Uhl
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GREAT
ATLANTIC & PACIFIC TEA COMPANY, INC. 10-Q FOR THE THIRD QUARTER ENDED NOVEMBER
29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> NOV-29-1997
<CASH> 172498
<SECURITIES> 0
<RECEIVABLES> 242943
<ALLOWANCES> 0
<INVENTORY> 936576
<CURRENT-ASSETS> 1388193
<PP&E> 1595189
<DEPRECIATION> 0
<TOTAL-ASSETS> 3160513
<CURRENT-LIABILITIES> 1026178
<BONDS> 939338
0
0
<COMMON> 38251
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<TOTAL-LIABILITY-AND-EQUITY> 3160513
<SALES> 7759107
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<CGS> (5537697)
<TOTAL-COSTS> (5537697)
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<INCOME-PRETAX> 66214
<INCOME-TAX> (15986)
<INCOME-CONTINUING> 50228
<DISCONTINUED> 0
<EXTRAORDINARY> (544)
<CHANGES> 0
<NET-INCOME> 49684
<EPS-PRIMARY> 1.30
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