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 20, 1998 Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
----------------------------------------------
(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
--------- ---------
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 20, 1998
----- ----------------------------
Common stock - $1 par value 38,252,966 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 20, June 14,
1998 1997
---------- ----------
Sales $3,078,386 $3,104,591
Cost of merchandise sold (2,192,073) (2,220,375)
---------- ----------
Gross margin 886,313 884,216
Store operating, general and
administrative expense (842,082) (831,210)
---------- ----------
Income from operations 44,231 53,006
Interest expense (21,032) (24,418)
Interest income 2,078 2,265
---------- ----------
Income before income taxes 25,277 30,853
Provision for income taxes (6,108) (8,066)
---------- ----------
Net income 19,169 22,787
Retained earnings at
beginning of period 495,510 447,768
Cash dividends (3,825) (3,825)
---------- ----------
Retained earnings at
end of period $ 510,854 $ 466,730
========== ==========
Earnings per share:
Net income per share-basic $ .50 $ .60
========== ==========
Net income per share-diluted $ .50 $ .60
========== ==========
Cash dividends $ .10 $ .10
========== ==========
Weighted average number of
common shares outstanding 38,252,966 38,248,966
Common stock equivalents 88,161 3,756
Weighted average number of
common and common equivalent ---------- ----------
shares outstanding 38,341,127 38,252,722
========== ==========
See Notes to Quarterly Report on Page 5.
- 1 -
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
June 20, 1998 Feb. 28, 1998
------------- -------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and short-term investments $ 140,350 $ 70,937
Accounts receivable 217,635 227,703
Inventories 881,606 882,229
Prepaid expenses and other assets 31,895 36,358
---------- ----------
Total current assets 1,271,486 1,217,227
---------- ----------
Property:
Property owned 1,534,253 1,506,819
Property leased 86,169 90,058
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Property-net 1,620,422 1,596,877
Other assets 181,981 181,149
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Total Assets $3,073,889 $2,995,253
========== ==========
See Notes to Quarterly Report on Page 5.
-2-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
June 20, 1998 Feb. 28, 1998
-------------- -------------
(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Current liabilities:
Current portion of long-term debt $ 17,910 $ 16,824
Current portion of obligations under
capital leases 12,125 12,293
Accounts payable 508,296 441,149
Book overdrafts 145,543 151,846
Accrued salaries, wages and benefits 147,531 146,064
Accrued taxes 64,717 57,856
Other accruals 121,175 129,098
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Total current liabilities 1,017,297 955,130
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Long-term debt 702,335 695,292
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Obligations under capital leases 115,815 120,980
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Deferred income taxes 122,137 120,618
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Other non-current liabilities 180,230 176,601
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Commitments and 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 38,252,966 38,253 38,253
Capital surplus 453,894 453,894
Cumulative translation adjustment (60,716) (54,815)
Minimum pension liability adjustment (6,210) (6,210)
Retained earnings 510,854 495,510
---------- ----------
Total shareholders' equity 936,075 926,632
---------- ----------
Total liabilities and shareholders'
equity $3,073,889 $2,995,253
========== ==========
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 20, 1998 June 14, 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,169 $ 22,787
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 72,194 71,439
Deferred income tax provision 3,390 5,541
(Gain) loss on disposal of owned property (3,295) 1,013
(Increase)decrease in receivables 8,731 (6,272)
Increase in inventories (3,055) (19,281)
(Increase) decrease in prepaid expenses
and other current assets 3,460 (13,775)
(Increase) decrease in other assets (2,115) 640
Increase in accounts payable 69,736 26,460
Decrease in accrued salaries,
wages and benefits (789) (3,329)
Increase in accrued taxes 7,007 9,324
Increase in other accruals
and other liabilities 4,129 7,158
Other operating activities, net (1,758) 127
--------- ---------
Net cash provided by operating activities 176,804 101,832
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (107,030) (83,221)
Proceeds from disposal of property 5,010 1,823
--------- ---------
Net cash used in investing activities (102,020) (81,398)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt 26,500 (72,000)
Proceeds under revolving lines of credit 160,000 41,148
Payments on revolving lines of credit (180,000) (173,641)
Proceeds from long-term borrowings 3,556 301,379
Payments on long-term borrowings (1,927) (2,420)
Principal payments on capital leases (3,744) (3,825)
Decrease in book overdrafts (4,419) (29,654)
Deferred financing fees - (2,434)
Proceeds from stock options exercised - 35
Cash dividends (3,825) (3,825)
--------- ---------
Net cash provided by (used in)
financing activities (3,859) 54,763
--------- ---------
Effect of exchange rate changes on
cash and short-term investments (1,512) (133)
--------- ---------
NET INCREASE IN CASH AND
SHORT-TERM INVESTMENTS 69,413 75,064
Cash and Short-Term Investments
at Beginning of Period 70,937 98,830
--------- ---------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 140,350 $ 173,894
========= =========
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 week period ended June
20, 1998 and June 14, 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 in the first 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
first quarter 1998 and 1997 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 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 $4.9 million and $5.2 million for the
first quarter of 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
earnings. Accordingly, at June 20, 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. 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. The Canadian
pretax income for financial statement purposes is higher than the taxable
income for tax purposes due to certain 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.
-5-
3) FOOD BASICS FRANCHISING
As of June 20, 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 $122 million and $99 million for the
16 week period ended in fiscal 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 nominal 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 $34.3 million and $37.6 million at June 20, 1998 and
February 28, 1998, respectively.
The inventory notes are collaterized 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 June 20, 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) NEW ACCOUNTING PRONOUNCEMENT
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 for the 16 week
period of fiscal 1998 and 1997 was as follows (in thousands):
16 Weeks Ended
-----------------------------------
June 20, 1998 June 14, 1997
---------------- ------------------
Net income $19,169 $22,787
Foreign currency translation
adjustment (5,901) (633)
--------- ---------
Total comprehensive income $13,268 $22,154
========== =========
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.
-6-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
16 WEEKS ENDED JUNE 20, 1998
----------------------------
OPERATING RESULTS
Sales for the first quarter ended June 20, 1998 of $3.1 billion decreased
$26 million or 0.8% from the prior year first quarter. The opening of 21
stores in new market areas since the beginning of fiscal 1997 added
approximately $61 million or 2.0% to sales in the first quarter of fiscal
1998. In addition, wholesale sales to the Food Basics franchised stores
increased $23 million or 23% to $122 million for the 16 weeks ended June 20,
1998, which increased total Company sales by 0.7%. These increases were
partially offset by the closure of 75 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 $77 million or
2.5% in the first quarter of fiscal 1998. A decrease in the Canadian
exchange rate reduced first quarter fiscal 1998 sales by $23 million. In
addition, same store sales ("same store sales" referred to herein include
replacement stores) decreased 0.5% or $14 million from the same period last
year.
Average weekly sales per supermarket were approximately $203,000 versus
$197,000 for the corresponding period of the prior year resulting in a 3%
increase. Same store sales for Canadian operations increased 4.5% from the
prior year while same store sales for U.S. operations declined 1.5% from the
prior year.
Gross margin as a percent of sales increased 31 basis points to 28.79% in
the first quarter of fiscal 1998 from 28.48% for the first quarter of fiscal
1997, resulting primarily from higher margins and a better mix of higher
margin items. The gross margin dollar increase of $2 million resulted from
an increase in the gross margin rate of $11 million partially offset by a
decrease in sales volume which reduced gross margin by $4 million and a
decrease in the Canadian exchange rate which decreased gross margin by $5
million. The U.S. operations accounted for the entire $2 million gross
margin increase as the increase in the gross margin rate of $16 million was
partially offset by a sales volume decrease which reduced gross margin by
$14 million. The Canadian operations increase in sales volume resulted in
an increase in gross margin of $10 million, which was fully offset by a
decrease in the gross margin rate of $5 million and a decline in the
Canadian exchange rate decreasing gross margin by $5 million.
Store operating, general, and administrative expense increased $11 million
or 58 basis points to 27.35% from 26.77% for the prior year. This increase
is primarily from higher occupancy costs, labor related costs and store
closing costs, partially offset by a gain on an asset sale.
Interest expense decreased $3 million or 14% from the previous year,
primarily due to a decrease in average debt outstanding of $79 million for
the sixteen week period in the first quarter 1998 as compared to the first
quarter 1997.
Interest income of $2 million remained consistent with the prior year.
-7-
Income before income taxes for the first quarter ended June 20, 1998 was $25
million compared to $31 million for the comparable period in the prior year
for a decrease of approximately $6 million or 18%. The decrease is mainly
the result of higher store operating, general and administrative expenses of
$11 million, partially offset by higher gross margin of $2 million and lower
interest expense of $3 million.
The income tax provisions recorded in the first 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 first quarter of fiscal 1998 was 24.2% versus an effective
tax rate of 26.1% for the first quarter of fiscal 1997. The decrease in the
effective tax rate is the result of the higher earnings provided by the
Canadian operations. The first 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 first 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 $4.9 million and $5.2 million for the first
quarter of 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 earnings. Accordingly,
at June 20, 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. 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. The
Canadian pretax income for financial statement purposes is higher than the
taxable income for tax purposes due to certain 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the first quarter of fiscal 1998 with working capital of
$254 million compared to $262 million at the beginning of the fiscal year.
The Company had cash and short-term investments aggregating $140 million at
the end of the first quarter of fiscal 1998 compared to $71 million as of
fiscal 1997 year end. Short-term investments were approximately $31 million
and $20 million at June 20, 1998 and February 28, 1998, respectively, and
consisted primarily of commercial paper.
-8-
The Company has an unsecured five year $465 million U.S. credit agreement
and a five year C$50 million Canadian 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. As of June 20, 1998, the Company had $70 million outstanding
against the Credit Agreement. Accordingly, as of June 20, 1998, the Company
had $430 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 June 20, 1998, the
Company had $64 million outstanding on the uncommitted lines of credit. The
Company has an additional $97 million available in uncommitted lines of
credit as of June 20, 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 June 20, 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 16 weeks ended June 20, 1998, capital expenditures totaled $107
million, which included 7 new stores and 28 remodels and enlargements.
Currently, the Company expects to achieve its fiscal 1998 planned capital
expenditures of approximately $300 million. Accordingly, the Company
expects to have capital expenditures of approximately $193 million
throughout the remainder of fiscal 1998.
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.
-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 14, 1998, there
were 35,533,143 shares or 92.9% of the 38,252,966 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 99.3% of the shares present. Deloitte & Touche LLP was re-
elected as the Company's independent auditor by at least 99.9% of
the shares present.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
-10-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
Date: August 3, 1998 By: /s/ Kenneth A. Uhl
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
-12-
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GREAT
ATLANTIC AND PACIFIC TEA COMPANY, INC. 10-Q FOR THE FIRST QUARTER ENDED JUNE 20,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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