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 September 12, 1998 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 12, 1998
----- ---------------------------------
Common stock - $1 par value 38,286,716 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 28 Weeks Ended
Sept. 12, Sept. 6, Sept. 12, Sept. 6,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Sales $2,330,249 $2,335,695 $5,408,635 $5,440,286
Cost of merchandise sold (1,656,971) (1,662,228) (3,849,044) (3,882,603)
---------- ---------- ---------- ----------
Gross margin 673,278 673,467 1,559,591 1,557,683
Store operating, general and
administrative expense (644,625) (634,827) (1,486,707) (1,466,037)
---------- ---------- ---------- ----------
Income from operations 28,653 38,640 72,884 91,646
Interest expense (15,781) (18,928) (36,813) (43,346)
Interest income 1,559 2,040 3,637 4,305
---------- ---------- ---------- ----------
Income before income taxes 14,431 21,752 39,708 52,605
Provision for income taxes (3,480) (5,545) (9,588) (13,611)
---------- ---------- ---------- ----------
Income before extraordinary
item 10,951 16,207 30,120 38,994
Extraordinary loss on early
extinguishment of debt
(net of income tax benefit
of $394) - (544) - (544)
---------- ---------- ---------- ----------
Net income 10,951 15,663 30,120 38,450
Retained earnings at
beginning of period 510,854 466,730 495,510 447,768
Cash dividends (3,829) (3,825) (7,654) (7,650)
---------- ---------- ---------- ----------
Retained earnings at
end of period $ 517,976 $ 478,568 $ 517,976 $ 478,568
========== ========== ========== ==========
Basic earnings (loss)
per share:
Income before extra-
ordinary item $ .29 $ .42 $ .79 $ 1.02
Extraordinary loss on early
extinguishment of debt - (.01) - (.01)
---------- ---------- ---------- ----------
Net income per share - basic $ .29 $ .41 $ .79 $ 1.01
========== ========== ========== ==========
Diluted earnings (loss)
per share:
Income before extra-
ordinary item $ .29 $ .42 $ .79 $ 1.02
Extraordinary loss on early
extinguishment of debt - (.01) - (.01)
---------- ---------- ---------- ----------
Net income per share -
diluted $ .29 $ .41 $ .79 $ 1.01
========== ========== ========== ==========
Cash dividends $ .10 $ .10 $ .20 $ .20
========== ========== ========== ==========
Weighted average number of
common shares outstanding 38,294,716 38,248,966 38,282,287 38,248,966
Common stock equivalents 54,427 5,901 72,025 4,342
---------- ---------- ---------- ----------
Weighted average number of
common and common
equivalent shares
outstanding 38,349,143 38,254,867 38,354,312 38,253,308
========== ========== ========== ==========
See Notes to Quarterly Report on Page 5.
Page 1
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
September 12, 1998 February 28, 1998
------------------ ------------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and short-term investments $ 107,050 $ 70,937
Accounts receivable 200,366 227,703
Inventories 883,108 882,229
Prepaid expenses and other assets 36,895 36,358
---------- ----------
Total current assets 1,227,419 1,217,227
---------- ----------
Property:
Property owned 1,575,628 1,506,819
Property leased 83,008 90,058
---------- ---------
Property-net 1,658,636 1,596,877
Other assets 176,158 181,149
---------- ----------
Total assets $3,062,213 $2,995,253
========== ==========
See Notes to Quarterly Report on Page 5.
Page 2
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
Sept. 12, 1998 Feb. 28, 1998
-------------- -------------
(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Current liabilities:
Current portion of long-term debt $ 7,703 $ 16,824
Current portion of obligations under
capital leases 11,776 12,293
Accounts payable 520,967 441,149
Book overdrafts 138,602 151,846
Accrued salaries, wages and benefits 139,892 146,064
Accrued taxes 60,737 57,856
Other accruals 128,225 129,098
---------- ----------
Total current liabilities 1,007,902 955,130
---------- ----------
Long-term debt 692,462 695,292
---------- ----------
Obligations under capital leases 111,454 120,980
---------- ----------
Deferred income taxes 123,781 120,618
---------- ----------
Other non-current liabilities 187,512 176,601
---------- ----------
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 38,286,716 and 38,252,966,
respectively 38,287 38,253
Capital surplus 454,848 453,894
Cumulative translation adjustment (65,799) (54,815)
Minimum pension liability adjustment (6,210) (6,210)
Retained earnings 517,976 495,510
---------- ----------
Total shareholders' equity 939,102 926,632
---------- ----------
Total liabilities and shareholders'
equity $3,062,213 $2,995,253
========== ==========
See Notes to Quarterly Report on Page 5.
Page 3
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
28 Weeks Ended
Sept. 12, 1998 Sept. 6, 1997
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,120 $ 38,450
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 126,361 125,402
Deferred income tax provision 5,033 3,914
Gain on disposal of owned property (3,133) (1,259)
(Increase) decrease in receivables 23,925 (10,172)
Increase in inventories (7,652) (19,219)
Increase in prepaid expenses and other
current assets (112) (18,118)
(Increase) decrease in other assets 5,433 (749)
Increase in accounts payable 86,199 18,312
Decrease in accrued salaries,
wages and benefits (7,741) (1,410)
Increase in accrued taxes 3,175 10,629
Increase in other accruals
and other liabilities 17,706 362
Other operating activities, net (4,535) (166)
--------- ---------
Net cash provided by operating activities 274,779 145,976
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (208,224) (139,931)
Proceeds from disposal of property 5,831 8,996
--------- ---------
Net cash used in investing activities (202,393) (130,935)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt 22,500 (72,000)
Proceeds under revolving lines of credit 240,000 41,148
Payments on revolving lines of credit (275,000) (173,562)
Proceeds from long-term borrowings 3,600 301,451
Payments on long-term borrowings (3,051) (23,349)
Decrease in book overdrafts (9,593) (7,790)
Principal payments on capital leases (6,463) (6,719)
Deferred financing fees - (2,519)
Cash dividends (7,654) (7,650)
Proceeds from stock options exercised 988 34
--------- ---------
Net cash provided by (used in)
financing activities (34,673) 49,044
--------- ---------
Effect of exchange rate changes on
cash and short-term investments (1,600) (126)
--------- ---------
NET INCREASE IN CASH AND
SHORT-TERM INVESTMENTS 36,113 63,959
Cash and Short-Term Investments
at Beginning of Period 70,937 98,830
--------- ---------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 107,050 $ 162,789
========= =========
See Notes to Quarterly Report on Page 5.
Page 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
12, 1998 and September 6, 1997 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 1997 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 1998 and 1997 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 1998 and 1997, the income
tax provisions mainly reflect 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 28 week period ended in fiscal
years 1998 and 1997, the Canadian operations generated pretax earnings
and reversed a portion of the valuation allowance to the extent of such
pretax earnings. The reversal of the valuation allowance amounted to
$7.7 million and $8.8 million for the 28 week period ended in fiscal
years 1998 and 1997, respectively. Although Canada generated pretax
earnings, the Company was unable to conclude that the Canadian deferred
tax assets were more likely than not to be realized. This conclusion was
based in part on Management's assessment of the competitive Canadian
marketplace and the level of the Canadian pretax earnings, which for
financial statement purposes is higher than the taxable income for tax
purposes due to differences between the financial statement and income
tax treatment of certain items. This is of further significance since
the largest portion of the Canadian deferred tax asset relates to net
operating loss carryforwards which expire between fiscal 1999 and fiscal
2002. The positive evidence that Management believes is necessary in
order to reverse some or all of the Canadian deferred tax asset valuation
allowance is a trend in earnings to a level which would allow Management
to conclude that it is more likely than not that a portion or all of the
deferred tax assets would be realized. Accordingly, at September 12,
1998 the Company is continuing to fully reserve its Canadian net deferred
tax asset. 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 the Canadian net deferred tax asset.
Page 5
3) FOOD BASICS FRANCHISING
As of September 12, 1998, the Company served 53 Food Basics franchised
stores. These franchisees are required to purchase inventory exclusively
from the Company which acts as a wholesaler to the franchisees. The
Company had sales to these franchised stores of $207 million and $172
million for the 28 week period ended in fiscal years 1998 and 1997,
respectively. In addition, the Company subleases the stores 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 fee which mainly
represents the reimbursement of costs incurred to provide such services.
Included in other assets are Food Basics franchising business
receivables, net of allowance for doubtful accounts, amounting to
approximately $32.0 million and $37.6 million at September 12, 1998 and
February 28, 1998, respectively.
The inventory notes are collateralized by the inventory in the stores,
while the equipment lease receivables are collateralized by the equipment
in the stores. The current portions of the inventory notes and equipment
leases of approximately $1.8 million and $1.9 million are included in
accounts receivable at September 12, 1998 and February 28, 1998,
respectively.
The repayment of the inventory notes and equipment leases are dependent
upon positive operating results of the stores. To the extent that the
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%.
Page 6
5) NEW ACCOUNTING PRONOUNCEMENTS
Effective March 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
Statement requires that all components of comprehensive income be
reported prominently in the financial statements. Currently, the Company
has other comprehensive income relating to foreign currency translation
adjustment. The Company's total comprehensive income is as follows (in
thousands):
12 Weeks Ended 28 Weeks Ended
Sept. 12, Sept. 6, Sept. 12, Sept. 6,
1998 1997 1998 1997
-------- -------- --------- --------
Net income $10,951 $15,663 $30,120 $38,450
Foreign currency translation
adjustment (5,083) (37) (10,984) (670)
------- ------- ------- -------
Total comprehensive income $ 5,868 $15,626 $19,136 $37,780
======= ======= ======= =======
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). This Statement
requires that all derivative instruments be measured at fair value and
recognized in the statement of financial position as either assets or
liabilities. The Company is currently studying the effects of SFAS No.
133 on its cross-currency and interest rate swaps and expects to adopt
SFAS No. 133 in fiscal 2000.
Page 7
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 SEPTEMBER 12, 1998
--------------------------------
OPERATING RESULTS
Sales for the second quarter ended September 12, 1998 of $2.3 billion
decreased $5 million or 0.2% from the prior year second quarter amount. The
opening of 18 stores in new market areas, excluding replacement stores,
since the second quarter of fiscal 1997 added approximately $46 million or
2.0% to sales in the second quarter of fiscal 1998. In addition, wholesale
sales to the Food Basics franchised stores increased $12 million or 16% to
$85 million for the 12 weeks ended September 12, 1998. These increases were
offset by the closure of 69 stores, excluding replacement stores, since the
beginning of the second quarter of fiscal 1997, of which 11 have been sold
in the Carolina market, which reduced total sales by approximately $69
million or 3.0% in the second quarter of fiscal 1998. A decrease in the
Canadian exchange rate reduced second quarter fiscal 1998 sales by $37
million or 1.6%. In addition, same store sales ("same store sales" referred
to herein include replacement stores) increased 1.8% or $37 million from the
same period last year.
Average weekly sales per supermarket were approximately $208,400 versus
$200,100 for the corresponding period of the prior year resulting in a 4.1%
increase. Same store sales for Canadian operations increased 3.2% from the
prior year and same store sales for U.S. operations increased 1.5% from the
prior year.
Gross margin as a percent of sales increased 6 basis points to 28.89% in the
second quarter of fiscal 1998 from 28.83% for the second quarter of fiscal
1997, resulting primarily from a better product mix of higher margin items
coupled with a margin recovery at our Waldbaums group. The gross margin
dollar remained flat when compared to the same period of the prior year.
The U.S. operations gross margin rate declined by $2 million which was fully
offset by an increase of $2 million in sales volume. The Canadian
operations had an increase of $3 million in the gross margin rate and an
increase of $6 million in sales volume, both of which were fully offset by a
decline of $9 million in the Canadian exchange rate.
Store operating, general, and administrative expense increased $10 million
or 48 basis points to 27.66% from 27.18% for the corresponding period of the
prior year. Included in store operating, general and administrative
expenses is a litigation charge of $4 million. Excluding the litigation
charge, store operating, general, and administrative expense increased $6
million or 31 basis points to 27.49% from 27.18% for the corresponding
period of the prior year. This increase is primarily due to a $4 million
increase from the prior year amount in store closing costs resulting from
the Company's plan to close older outmoded stores, coupled with higher
occupancy costs of the new generation superstores.
Interest expense decreased $3 million or 17% from the corresponding period
of the previous year, primarily due to a decrease in average debt
outstanding of $91 million for the second quarter of fiscal 1998 as compared
to the second quarter of fiscal 1997.
Interest income of $2 million remained consistent with the prior year.
Page 8
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 second quarter ended September 12, 1998
was $14 million compared to $21 million for the comparable period in the
prior year for a decrease of approximately $7 million or 34%. Excluding the
litigation charge, income before income taxes for the 12 week period ended
September 12, 1998 decreased approximately $3 million or 15% from the same
period last year. The $3 million decrease is mainly the result of higher
store closing and other store operating expenses of $6 million, partially
offset by lower interest expense of $3 million.
The income tax provisions recorded in the second quarter of fiscal years
1998 and 1997 reflect the Company's estimated expected annual tax rates
applied to their respective domestic and foreign financial results. The
effective tax rate for the second quarter of fiscal 1998 was 24.1% versus an
effective tax rate of 25.5% for the second quarter of fiscal 1997. The
decrease in the effective tax rate is the result of the Canadian operations
providing a higher percentage of total Company earnings in the current year
as compared to the prior year. The second quarter 1998 and 1997 income tax
provisions mainly reflect 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 second quarter of fiscal 1998 and 1997 the
Canadian operations generated pretax earnings and reversed a portion of the
valuation allowance to the extent of such pretax earnings. The reversal of
the valuation allowance amounted to $2.8 million and $3.7 million for the 12
week period of fiscal years 1998 and 1997, respectively. The valuation
allowance reversal for the 28 week period of fiscal years 1998 and 1997
amounted to $7.7 million and $8.8 million, respectively. Although Canada
generated pretax earnings, the Company was unable to conclude that the
Canadian deferred tax assets were more likely than not to be realized. This
conclusion was based in part on Management's assessment of the competitive
Canadian marketplace and the level of the Canadian pretax earnings, which
for financial statement purposes is higher than the taxable income for tax
purposes due to differences between the financial statement and income tax
treatment of certain items. This is of further significance since the
largest portion of the Canadian deferred tax asset relates to net operating
loss carryforwards which expire between fiscal 1999 and fiscal 2002. The
positive evidence that Management believes is necessary in order to reverse
some or all of the Canadian deferred tax asset valuation allowance is a
trend in earnings to a level which would allow Management to conclude that
it is more likely than not that a portion or all of the deferred tax assets
would be realized. Accordingly, at September 12, 1998 the Company is
continuing to fully reserve its Canadian net deferred tax asset. 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 the Canadian
net deferred tax asset.
Page 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
28 WEEKS ENDED SEPTEMBER 12, 1998
--------------------------------
OPERATING RESULTS
Sales for the 28 weeks ended September 12, 1998 of $5.4 billion decreased
$32 million or 0.6% from the prior year. The opening of 24 stores in new
market areas, excluding replacement stores, since the beginning of the
second quarter of fiscal 1997 added approximately $108 million or 2.0% to
sales in the 28 week period of fiscal 1998. In addition, wholesale sales to
the Food Basics franchised stores increased $35 million or 20% to $207
million for the 28 week period ended September 12, 1998. These increases
were partially offset by the closure of 86 stores, excluding replacement
stores, since the beginning of fiscal 1997, of which 11 have been sold in
the Carolina market, which reduced total sales by approximately $147 million
or 2.8% in the 28 week period of fiscal 1998. A decrease in the Canadian
exchange rate reduced sales by $60 million or 1.1% in the 28 week period of
fiscal 1998. In addition, same store sales ("same store sales" referred to
herein include replacement stores) increased 0.5% or $23 million from the
same period last year.
Average weekly sales per supermarket were approximately $205,300 versus
$198,300 for the corresponding period of the prior year resulting in a 3.5%
increase. Same store sales for Canadian operations increased 3.9% from the
prior year while same store sales for U.S. operations decreased 0.2% from
the prior year.
Gross margin as a percent of sales increased 21 basis points to 28.84% from
28.63% for the prior year, resulting primarily from a better product mix of
higher margin items coupled with a margin recovery at our Waldbaums group.
The gross margin dollar increase of $2 million resulted from an increase in
the gross margin rate of $11 million and an increase in sales volume of $5
million, both of which were partially offset by a decrease in the Canadian
exchange rate of $14 million. The U.S. operations accounted for the entire
$2 million gross margin increase as the increase in the gross margin rate of
$14 million was partially offset by a sales volume decrease which reduced
gross margin by $12 million. The Canadian operations increase in sales
volume resulted in an increase in gross margin of $17 million, which was
fully offset by a decrease in the gross margin rate of $3 million and a
decrease in the Canadian exchange rate decreasing gross margin by $14
million.
Store operating, general, and administrative expense increased $21 million
or 54 basis points to 27.49% from 26.95% for the prior year. Included in
store operating, general and administrative expenses is a litigation charge
of $4 million. Excluding the litigation charge, store operating, general,
and administrative expense increased $17 million or 46 basis points to
27.41% from 26.95% for the corresponding period of the prior year. This
increase is primarily due to an $8 million increase from the prior year
amount in store closing costs resulting from the Company's plan to close
older outmoded stores, coupled with higher occupancy costs of the new
generation superstores.
Interest expense decreased $6 million or 15% from the previous year,
primarily due to a decrease in average debt outstanding of $84 million for
the 28 week period of fiscal 1998 as compared to the prior year.
Interest income of $4 million remained consistent with the prior year.
Page 10
Income before income taxes for the 28 week period ended September 12, 1998
was $40 million compared to $53 million for the comparable period in the
prior year for a decrease of approximately $13 million or 25%. Excluding
the litigation charge, income before income taxes for the 28 week period
ended September 12, 1998 decreased $9 million or 17% from the same period
last year. The $9 million decrease is mainly the result of higher store
closing and other store operating expenses of $17 million, partially offset
by lower interest expense of $6 million and higher gross margin of $2
million.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the second quarter with working capital of $220 million
compared to $262 million at the beginning of the fiscal year. The Company
had cash and short-term investments aggregating $107 million at the end of
the second quarter of fiscal 1998 compared to $71 million as of fiscal 1997
year end. There were no short-term investments at September 12, 1998 and
approximately $20 million at February 28, 1998, which were primarily
invested in commercial paper.
The Company has an unsecured five year $498 million revolving credit
agreement (the "Credit Agreement") expiring June 10, 2002, with a syndicate
of banks, enabling it to borrow funds on a revolving basis sufficient to
refinance short-term borrowings. The Credit Agreement is comprised of the
U.S. credit agreement amounting to $465 million and the Canadian credit
agreement amounting to C$50 million (U.S. $33 million at September 12,
1998). As of September 12, 1998, the Company had $55 million outstanding
against the Credit Agreement. Accordingly, as of September 12, 1998, the
Company had $443 million available under the Credit Agreement.
In addition to the Credit Agreement, the Company also has various
uncommitted lines of credit with numerous banks. As of September 12, 1998,
the Company had $60 million outstanding on the uncommitted lines of credit.
The Company has an additional $161 million available in uncommitted lines of
credit as of September 12, 1998.
The Company's Credit 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 12, 1998.
On July 1, 1998, Moody's Investor's Service downgraded the Company's
existing senior debt rating to Ba1 from Baa3. The Company's rating from
Standard & Poor's remained unchanged from the fiscal year end rating of
BBB-. Rating changes could affect the availability and cost of financing to
the Company.
For the 28 weeks ended September 12, 1998, the net cash used in investing
activities totaled $202 million. This included capital expenditures of $208
million, which included 18 new stores and 44 remodels and enlargements.
Currently, the Company projects that total cash used in investing activities
will amount to approximately $360 million. Accordingly, the Company expects
to have cash outlay relating to investing activities of approximately $158
million throughout the remainder of fiscal 1998.
Page 11
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 1998.
Page 12
YEAR 2000 COMPLIANCE
The Company has formed an ongoing task force to review the entire range of
the Company's operations relating to the Year 2000 issues. This task force
reports to the Vice Chairman of the Board of Directors. Assessment of those
functions of the business that require attention and resources to achieve
Year 2000 compliance is in progress throughout the entire organization. The
Information Technology ("IT") assessment is complete and the non-IT areas are
approximately 10% complete. The current estimate of the remediation effort
(including new programs and components) is approximately 50% complete in the
IT area and is about to commence in the non-IT area. Testing of the systems
is to begin in the last half of 1998 and implementation of renovated and new
systems is in progress.
The costs to address the Company's Year 2000 issues are estimated to be
approximately $5 million. Approximately $1.8 million of these costs have
been incurred through 1997 and the second quarter of 1998. In addition, the
Company will incur additional capital expenditures of approximately $5
million for new equipment during the remainder of fiscal 1998 and fiscal 1999
that is Year 2000 compliant. Some IT projects have been deferred due to the
Year 2000 project, however, the Company believes that such a deferral will
not affect the Company's financial performance.
From an IT perspective, the task force is responsible for assessing the
extent of affected software/hardware and developing procedures to resolve
the potential problems associated with that software/hardware. The
procedures developed include making the necessary changes to the affected
software, adequately testing the changes and phasing in the Year 2000
compliant programs to limit disruption or delay in the Company's normal
business activities. The Company is also in the process of updating vendor
software packages to the latest versions to insure all Company software is
Year 2000 compliant. Some in-store IT systems as well as other support area
IT systems will also need remediation to become Year 2000 compliant.
The risks of Year 2000 issues from a non IT area are principally as follows:
electrical outages resulting in breakdown of point of sale systems, lighting
and refrigeration equipment and the loss of utility service. In addition,
certain store equipment may have imbedded chips or microprocessors that are
not Year 2000 compliant. The Company is in the process of identifying such
equipment and either replacing the affected chips or microprocessors or
purchasing new equipment that is compliant. The events noted above could
severely affect Company operations. The Company plans to mitigate the
potential effect of such issues by preparing a contingency plan as discussed
below.
Significant risk also arises out of the possible failure of vendors to
respond to Year 2000 issues. The Company is meeting with its major vendors
and suppliers to determine their state of readiness and to review the
contingency plans that they have developed. Companies that are compliant and
have prepared for contingencies will have a status as preferred suppliers.
With respect to other vendors that either are not Year 2000 compliant or do
not have adequate contingency or remediation plans, the Company will seek
alternative sources when possible.
Page 13
With respect to contingencies, a program is being developed to identify the
additional resources that will be necessary to fully run the Company when and
if, it is affected by the foregoing risk factors. Over the next year, the
Company will continue to expand its contingency plans and detailed procedures
in order to mitigate the effects of the Year 2000 issues that might affect
the Company.
The Company believes that it has allocated sufficient resources to resolve
all significant Year 2000 issues in a timely manner. Accordingly, the
Company plans to be Year 2000 compliant by October 1999.
CAUTIONARY NOTE
This report contains certain forward-looking statements about the future
performance of the Company which are based on Management's assumptions and
beliefs in light of the information currently available to it. The Company
assumes no obligation to update the information contained herein. These
forward-looking statements are subject to uncertainties and other factors
that could cause actual results to differ materially from such statements
including, but not limited to: competitive practices and pricing in the
food industry generally and particularly in the Company's principal markets;
the Company's relationships with its employees and the terms of future
collective bargaining agreements; the costs and other effects of legal and
administrative cases and proceedings; the nature and extent of continued
consolidation in the food industry; changes in the financial markets which
may affect the Company's cost of capital and the ability of the Company to
access the public debt and equity markets to refinance indebtedness and fund
the Company's capital expenditure program on satisfactory terms; supply or
quality control problems with the Company's vendors; changes in economic
conditions which affect the buying patterns of the Company's customers; and
the ability of the Company and its vendors, financial institutions and
others to resolve Year 2000 processing issues in a timely manner.
Page 14
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
On August 28, 1998 Capital Graphics Advertising Agency, Inc.
("Capital Graphics") was awarded a verdict against the Company
amounting to $4 million. This lawsuit is the result of the Company
terminating a relationship with an Atlanta printer which the
Company felt that it had a right to terminate. However, a jury
awarded Capital Graphics damages, plus interest and litigation
expenses totaling $4 million. The Company believes that it has
several strong bases for the appellate court to set aside the
jury's verdict and order a new trial. Accordingly, the Company
will proceed with an appeal and defend against this claim
vigorously.
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 20, 1998 Form 10-Q.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
Page 15
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 26, 1998 By: /s/ Kenneth A. Uhl
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
Page 16
<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 28 WEEK PERIOD ENDED
SEPTEMBER 12, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-END> SEP-12-1998
<CASH> 107050
<SECURITIES> 0
<RECEIVABLES> 200366
<ALLOWANCES> 0
<INVENTORY> 883108
<CURRENT-ASSETS> 1227419
<PP&E> 1658636
<DEPRECIATION> 0
<TOTAL-ASSETS> 3062213
<CURRENT-LIABILITIES> 1007902
<BONDS> 803916
0
0
<COMMON> 38287
<OTHER-SE> 900815
<TOTAL-LIABILITY-AND-EQUITY> 3062213
<SALES> 5408635
<TOTAL-REVENUES> 5408635
<CGS> (3849044)
<TOTAL-COSTS> (3849044)
<OTHER-EXPENSES> (1486707)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (33176)
<INCOME-PRETAX> 39708
<INCOME-TAX> (9588)
<INCOME-CONTINUING> 30120
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30120
<EPS-PRIMARY> .79
<EPS-DILUTED> .79
</TABLE>
