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 19, 1999 Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
----------------------------------------------
(Exact name of registrant as specified in charter)
Maryland 13-1890974
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive, Montvale, New Jersey 07645
- ------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 201-573-9700
------------
- -------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES XXX NO
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 19, 1999
----- ----------------------------
Common stock - $1 par value 38,324,966 shares
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF CONSOLIDATED OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
16 Weeks Ended
June 19, June 20,
1999 1998
---------- ----------
Sales $3,113,722 $3,078,386
Cost of merchandise sold (2,242,133) (2,192,073)
---------- ----------
Gross margin 871,589 886,313
Store operating, general and
administrative expense (881,299) (842,082)
---------- ----------
(Loss) income from operations (9,710) 44,231
Interest expense (24,394) (21,032)
Interest income 1,778 2,078
---------- ----------
(Loss) income before income taxes (32,326) 25,277
Benefit (provision) for income taxes 12,780 (6,108)
---------- ----------
Net (loss) income $ (19,546) $ 19,169
========== ==========
Earnings per share:
Net income per share-basic
and diluted $ (.51) $ .50
========== ==========
Weighted average number of
common shares outstanding 38,319,015 38,252,966
Common stock equivalents 94,442 88,161
Weighted average number of
common and common equivalent ---------- ----------
shares outstanding 38,413,457 38,341,127
========== ==========
See Notes to Consolidated Financial Statements
- 1 -
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
---------------------------------------------------
COMPREHENSIVE (LOSS) INCOME
---------------------------
(Dollars in thousands)
(Unaudited)
First Quarter FY 1999 Accumu-
- --------------------- lated
Other
Addi- Compre- Total
tional hensive Share-
Common Stock Paid-in Retained Income holders'
Shares Amount Capital Earnings (Loss) Equity
--------- ------- ------- -------- -------- --------
Balance at beginning
of period 38,290,716 $38,291 $454,971 $413,034 $(69,039) $837,257
Net Loss (19,546) (19,546)
Other Comprehensive
Income:
Foreign Currency
Translation
Adjustment 3,784 3,784
Exercise of Stock
Options 34,250 34 901 935
Cash Dividends
($.10 per share) (3,829) (3,829)
---------- ------- -------- -------- -------- --------
Balance at end of
period 38,324,966 $38,325 $455,872 $389,659 $(65,255)$818,601
========== ======= ======== ======= ======== ========
First Quarter FY 1998
- ---------------------
Balance at beginning
of period 38,252,966 $38,253 $453,894 $495,510 $(61,025 $926,632
Net Income 19,169 19,169
Other Comprehensive
Income:
Foreign Currency
Translation
Adjustment (5,901) (5,901)
Cash Dividends
($.10 per share) (3,825) (3,825)
---------- ------- -------- -------- -------- --------
Balance at end of
period 38,252,966 $38,253 $453,894 $510,854 $(66,926)$936,075
========== ======= ======= ======== ======== ========
Comprehensive (Loss) Income
- ---------------------------
First Quarter First Quarter
FY 1999 FY 1998
-------------- -------------
Net (Loss) Income $(19,546) $19,169
Foreign Currency
Translation
Adjustment 3,784 (5,901)
-------- -------
Total Comprehensive
(Loss) Income $(15,762) $13,268
======== =======
See Notes to Consolidated Financial Statements
-3-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
June 19, 1999 Feb. 27, 1999
------------- -------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and short-term investments $ 126,259 $ 136,810
Accounts receivable 173,836 204,700
Inventories 781,489 841,030
Prepaid expenses and other assets 61,014 41,497
---------- ----------
Total current assets 1,142,598 1,224,037
---------- ----------
Property:
Property owned 1,601,648 1,597,459
Property leased 86,965 89,028
---------- ----------
Property-net 1,688,613 1,686,487
Other assets 213,968 231,217
---------- ----------
Total Assets $3,045,179 $3,141,741
========== ==========
See Notes to Consolidated Financial Statements
-4-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
June 19, 1999 Feb. 27, 1999
-------------- -------------
(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Current liabilities:
Current portion of long-term debt $ 4,243 $ 4,956
Current portion of obligations under
capital leases 11,669 11,483
Accounts payable 545,623 557,318
Book overdrafts 132,782 160,288
Accrued salaries, wages and benefits 149,310 152,107
Accrued taxes 61,049 54,819
Other accruals 195,088 193,092
---------- ----------
Total current liabilities 1,099,764 1,134,063
---------- ----------
Long-term debt 657,451 728,390
---------- ----------
Obligations under capital leases 113,526 115,863
---------- ----------
Deferred income taxes 24,449 23,309
---------- ----------
Other non-current liabilities 331,388 302,859
---------- ----------
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 38,324,966 and
38,290,716, shares, respectively 38,325 38,291
Additional paid-in capital 455,872 454,971
Accumulative other comprehensive loss (65,255) (69,039)
Retained earnings 389,659 413,034
---------- ----------
Total shareholders' equity 818,601 837,257
---------- ----------
Total liabilities and shareholders'
equity $3,045,179 $3,141,741
========== ==========
See Notes to Consolidated Financial Statements
-5-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
16 Weeks Ended
June 19, 1999 June 20, 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (19,546) $ 19,169
Adjustments to reconcile net (loss) income
to cash provided by operating activities:
Store/Facilities exit charge and asset
write-off 27,920 -
Depreciation and amortization 69,966 72,194
Deferred income tax (benefit) provision (16,397) 3,390
Gain on disposal of owned property (144) (3,295)
Decrease in receivables 31,843 8,731
Decrease (increase) in inventories 62,993 (3,055)
Decrease in prepaid expenses
and other current assets 1,375 3,460
Increase in other assets (791) (2,115)
(Decrease) increase in accounts payable (14,300) 69,736
Decrease in accrued salaries,
wages and benefits (3,460) (789)
Increase in accrued taxes 6,235 7,007
(Decrease)increase in other accruals
and other liabilities (3,696) 4,129
Other operating activities, net (1,875) (1,758)
--------- ---------
Net cash provided by operating activities 140,123 176,804
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (103,009) (107,030)
Proceeds from disposal of property 58,460 5,010
--------- ---------
Net cash used in investing activities (44,549) (102,020)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt (23,100) 26,500
Proceeds under revolving lines of credit 20,063 160,000
Payments on revolving lines of credit (67,000) (180,000)
Proceeds from long-term borrowings - 3,556
Payments on long-term borrowings (1,615) (1,927)
Principal payments on capital leases (3,588) (3,744)
Decrease in book overdrafts (29,234) (4,419)
Proceeds from stock options exercised 935 -
Cash dividends (3,829) (3,825)
--------- ---------
Net cash used in financing activities (107,368) (3,859)
Effect of exchange rate changes on
cash and short-term investments 1,243 (1,512)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND
SHORT-TERM INVESTMENTS (10,551) 69,413
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD 136,810 70,937
--------- ---------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 126,259 $ 140,350
========= =========
See Notes to Consolidated Financial Statements
-6-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1) BASIS OF PRESENTATION
The consolidated financial statements for the 16 week period ended June
19, 1999 and June 20, 1998 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, except for the store and facilities exit costs
discussed in Note 5 below. 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 1998 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 first quarter of fiscal years
1999 and 1998 reflect the Company's estimated expected annual tax rates
applied to their respective domestic and foreign financial results. For
the first quarter of fiscal 1999, the income tax benefit of $12.8 million
relates to taxes on U.S. and Canadian income. For the first quarter of
fiscal 1998, the income tax provision reflected mainly taxes on U.S.
operations as the Canadian operation income tax expense was principally
offset by the reversal of its deferred tax asset valuation allowance.
During the first quarter of fiscal 1998, the Company reversed $4.9
million of the Canadian valuation allowance to the extent that the
Canadian operation had taxable income.
3) FOOD BASICS FRANCHISING
As of June 19, 1999, the Company served 57 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 $144 million and $122 million for the
16 week period ended in fiscal years 1999 and 1998, 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.
-7-
Included in other assets are Food Basics franchising business
receivables, net of allowance for doubtful accounts, amounting to
approximately $38.6 million and $36.4 million at June 19, 1999 and
February 27, 1999, 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 portion of the inventory notes and equipment
leases, net of allowance for doubtful accounts, amounting to
approximately $2.6 million and $2.2 million are included in accounts
receivable at June 19, 1999 and February 27, 1999, 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 PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 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. In addition, the accounting for changes in the
fair value of a derivative (gains and losses) depends on the intended use
of the derivative and the resulting designation. For a derivative
designated as a hedge, the change in fair value will be recognized as a
component of other comprehensive income; for a derivative not designated
as a hedge, the change in the fair value will be recognized in the
statement of operations. Currently, the Company has one derivative
instrument in the form of a cross-currency swap.
In June 1999, the FASB issued SFAS No. 137, "Accounting For Derivative
Instruments And Hedging Activities - Deferral Of The Effective Date of
FASB Statement No. 133" which delays the adoption of SFAS 133 for one
year, to fiscal years beginning after June 15, 2000. The Company plans
to adopt SFAS 133 in the first quarter of fiscal 2001. The Company is
currently evaluating the impact this pronouncement will have on the
Consolidated Financial Statements.
5) STORE AND FACILITIES EXIT COSTS
In May 1998, the Company initiated a vigorous assessment of all aspects
of its business operations in order to identify the factors that were
impacting the performance of the Company.
-8-
As a result of the above assessment, in the third quarter of fiscal 1998,
the Company decided to exit two warehouse facilities, a coffee plant and
a bakery plant in Canada. In connection with the exit plan, the Company
recorded a charge of approximately $11 million which was comprised of $7
million of severance, $3 million of facilities occupancy costs for the
period subsequent to closure and $1 million to write-down the facilities
to their estimated fair value. The Company has paid $5 million of the
severance cost as of June 19, 1999, and expects the remainder to be paid
by the end of fiscal 1999. As of June 19, 1999, the Company has incurred
$2 million of occupancy costs.
At February 27, 1999, the Company had closed and terminated operations
with respect to the warehouses and the coffee plant. The volume
associated with the two warehouses has been transferred to other
warehouses in close geographic proximity. Further, the manufacturing
processes of the coffee plant have been transferred to the Company's
remaining coffee processing facility. The processing associated with the
Canadian bakery has been outsourced effective January 1999.
In addition, on December 8, 1998, the Company's Board of Directors
approved a plan which included the exit of 127 underperforming stores
throughout the United States and Canada and the disposal of two other
properties. Included in the 127 stores are 31 stores representing the
entire Richmond, Virginia market. Further on January 28, 1999, the Board
of Directors approved the closure of five additional underperforming
stores. In connection with the Company's plan to exit these 132 stores
and the write-down of two properties, the Company recorded a fourth
quarter charge of approximately $215 million. This $215 million charge
was comprised of $8 million of severance, $1 million of facilities
occupancy costs, $114 million of store occupancy costs, which
principally relates to the present value of future lease obligations, net
of anticipated sublease recoveries, which extend through fiscal 2028, an
$83 million write-down of store fixed assets and a $9 million write-down
to estimated fair value of the two properties which are held for sale. To
the extent fixed assets included in those stores identified for closure
could be utilized in other continuing store locations, the Company has or
will transfer such assets to those continuing stores. To the extent such
fixed assets cannot be transferred, the Company will scrap such fixed
assets and, accordingly, the write-down was calculated utilizing an
estimated scrap value for such assets. This fourth quarter charge of $215
million was reduced by approximately $2 million due to changes in
estimates of pension withdrawal liabilities and fixed asset write-downs
from the time the original charge was recorded. In addition, there were
additional charges directly related to the plan which could not be
accrued in 1998, but will be expensed as incurred as the plan is
executed. In the first quarter of fiscal 1999, the Company recorded an
additional pretax charge of $8 million for severance. The Company has
paid $6 million of the severance costs as of June 19, 1999 and expects
the remainder to be paid by the first quarter of fiscal 2000.
-9-
On April 26, 1999, the Company announced that it had reached definitive
agreements to sell 14 stores in the Atlanta, Georgia market, two of which
were previously included in the Company's store exit program. In
conjunction with the sale, the Company decided to exit the entire Atlanta
market and close the remaining 22 stores, as well as the distribution
center and administrative office. Accordingly, the Company recorded a
fiscal 1999 first quarter net pre-tax charge of approximately $5 million.
This charge is comprised of severance costs of $6 million, future lease
commitments of $11 million, net of a $12 million gain related to the
disposition of fixed and intangible assets. The net charge is recorded
as "store operating, general and administrative expense".
The following tabular reconciliation summarizes the activity related to
the aforementioned charges since the beginning of the fiscal year.
Reserve Reserve
Balance Balance
at at
Beginning End
of of
(in thousands) Period Utilization Addition(1) Period
- -------------- -------- ----------- -------- ---------
Store Occupancy $114,532 $ 8,792 (2) $11,339 $134,663
Severance and Benefits 10,066 (7,332) 13,393 16,127
Facilities occupancy 4,038 (2,098) 3,188 5,128
-------- ------- ------- --------
Total $128,636 $ (638) $27,920 $155,918
======== ======= ======= ========
(1) The addition represents an increase to the store occupancy reserve for
the present value interest accrued and the additional severance cost and
the cost (including store occupancy, severance and facilities costs) of
exiting the Atlanta market.
(2) Store occupancy utilization is comprised of $5.2 million of lease
payments for the period, net of a $14 million realized gain on the
assignment of leases which was included in the original charge recorded
during fiscal 1998.
As of June 19, 1999, the Company closed 110 of the 132 stores identified,
including all 31 stores in the Richmond, Virginia market and 34 of the
Atlanta store exit program. The remaining 22 stores will be closed over the
next two quarters of fiscal 1999.
At June 19, 1999, $47.4 million of the reserve is included in "Other
accruals" and $108.5 million is included in "Other non-current liabilities"
in the accompanying consolidated balance sheet.
-10-
Based upon current available information, Management evaluated the reserve
balance as of June 19, 1999 and has concluded that it is adequate.
Included in the accompanying statement of operations are the operating
results of the 132 underperforming stores and the 34 Atlanta stores which
the Company is exiting. The operating results of such stores are as
follows:
(in thousands) 16 Weeks Ended
- -------------- -------------------
June 19, June 20,
1999 1998
-------- --------
Sales $256,037 $346,839
======== ========
Operating Loss $(21,459) $ (8,658)
======== ========
6) OPERATING SEGMENTS
During the fourth quarter of fiscal 1998, the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). This statement establishes standards for
reporting information about operating segments in annual financial
statements and selected information in interim financial statements. It
also establishes standards for related disclosures about products and
services and geographic areas. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
The Company's chief operating decision maker is the Chief Executive
Officer.
The Company currently operates in three reportable segments: United
States Retail, Canada Retail and Wholesale. The retail segments are
comprised of retail supermarkets in the United States and Canada, while
the wholesale segment is comprised of the Company's Canadian store
franchising operation which includes serving as the exclusive wholesaler
to such franchised stores.
The accounting policies for the segments are the same as those described
in the summary of significant accounting policies incorporated in the
Company's Fiscal 1998 Annual Report. The Company measures segment
performance based upon operating profit.
-11-
Interim information on segments are as follows:
(in thousands)
First Quarter Fiscal 1999
- ------------------------- U.S. Canada Total
Retail Retail Wholesale Company
---------- -------- --------- ----------
Sales $2,486,911 $483,101 $143,710 $3,113,722
Depreciation and amortization 61,907 8,059 - 69,966
Operating (loss) income (18,474) 4,824 3,940 (9,710)
Interest expense (20,265) (4,129) - (24,394)
Interest income 33 805 940 1,778
(Loss) income before taxes (38,706) 1,500 4,880 (32,326)
Total assets 2,480,410 478,965 85,804 3,045,179
Capital expenditures 88,089 14,920 - 103,009
First Quarter Fiscal 1998
- ------------------------- U.S. Canada Total
Retail Retail Wholesale Company
---------- -------- --------- ----------
Sales $2,485,158 $470,892 $122,336 $3,078,386
Depreciation and amortization 64,868 7,326 - 72,194
Operating income 31,135 11,323 1,773 44,231
Interest expense (17,055) (3,977) - (21,032)
Interest income 282 763 1,033 2,078
Income before taxes 14,362 8,109 2,806 25,277
Total assets 2,609,645 385,122 79,122 3,073,889
Capital expenditures 96,185 10,845 - 107,030
-12-
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
16 WEEKS ENDED JUNE 19, 1999
----------------------------
OPERATING RESULTS
Sales for the first quarter ended June 19, 1999 of $3.1 billion increased
$35 million or 1.1% from the prior year first quarter amount. The opening
of 33 stores in new locations, excluding replacement stores, since the
beginning of fiscal 1998 added approximately $171 million or 5.6% to sales
in the first quarter of fiscal 1999. In addition, wholesale sales to the
Food Basics franchised stores increased $21 million or 17.5% to $144 million
for the 16 weeks ended June 19, 1999, which increased total Company sales by
0.7%. These increases were partially offset by the closure of 209 stores,
excluding replacement stores, since the beginning of the first quarter of
fiscal 1998, which reduced total sales by approximately $269 million or 8.8%
in the first quarter of fiscal 1999. A decrease in the Canadian exchange
rate reduced first quarter fiscal 1999 sales by $22 million or 0.7%. In
addition, same store sales ("same store sales" referred to herein include
replacement stores) increased 5.3% or $135 million from the same period last
year.
Average weekly sales per supermarket were approximately $233,000 versus
$203,000 for the corresponding period of the prior year resulting in a 14.8%
increase. Same store sales for Canadian operations increased 5.7% from the
prior year and same store sales for U.S. operations increased 5.2% from the
prior year.
Gross margin as a percent of sales decreased 80 basis points to 27.99% in
the first quarter of fiscal 1999 from 28.79% for the first quarter of fiscal
1998. Margins were negatively impacted since the Company accelerated
inventory markdowns in stores that were identified for closure under Project
Great Renewal and the Atlanta market exit. The gross margin dollar decrease
of $15 million resulted from a decrease in the gross margin rate of $24
million and a decrease in the Canadian exchange rate of $5 million,
partially offset by an increase in sales volume of $14 million. The U.S.
operations gross margin decrease of $20 million results from a decrease in
gross margin rate of $21 million and an increase of $1 million in sales
volume. The Canadian operations gross margin increase of $5 million results
from a decrease of $3 million in gross margin rate, a decrease of $5 million
in the Canadian exchange rate and an increase of $13 million in sales
volume.
Store operating, general, and administrative expense increased $39 million
or 95 basis points to 28.30% from 27.35% for the corresponding period of the
-13-
prior year. The increase reflects charges relating to Project Great Renewal
consisting of severance cost of $8 million which could not be accrued in
1998, and a net charge of approximately $5 million for exiting the Atlanta
market. The cost of exiting the Atlanta market was comprised of $6 million
of severance, $11 million of store occupancy costs, which principally
relates to the present value of future lease obligations, net of a $12
million gain related to the disposition of fixed and intangible assets.
Also included in store operating, general and administrative expense for
1999 are shut-down costs of stores amounting to approximately $7 million
relating to the 44 Great Renewal store closures, 34 stores in the Atlanta
exit program, and facilities closed in 1998. In addition, the Company
incurred professional fees of $7 million associated with the implementation
of the store exit program, and approximately $5 million related to the
conversion of additional stores to Food Basics. The remaining increase of
$7 million is mainly related to higher occupancy costs of the new generation
of stores in 1999.
As of June 19, 1999, the Company closed 110 of the 132 stores identified as
part of Project Great Renewal and 34 stores relating to the Atlanta store
exit program. The remaining 22 stores will be closed over the next two
quarters of fiscal 1999. Further, during the next three quarters of fiscal
1999, the Company expects to incur pre-tax losses relating to Project Great
Renewal ranging between $50 and $60 million which are not currently
accruable. Such amounts principally represent operating losses of the
identified stores prior to closure, employee termination costs which have
not been communicated to such employees as of June 19, 1999, and the
potential impact of selling inventory at reduced prices.
Interest expense increased $3.4 million or 16.0% from the corresponding
period of the previous year, primarily due to the additional present value
interest related to the future lease obligations of the store exit and
Atlanta exit programs.
Loss before income taxes for the first quarter ended June 19, 1999 was $32
million compared to income before taxes of $25 million for the comparable
period in the prior year for a decrease of $57 million. The loss is
attributable principally to initiatives under the Company's Project Great
Renewal, exiting the Atlanta market and the increase in interest expense.
The income tax benefit recorded in the first quarter of fiscal 1999 reflects
the Company's estimated expected annual tax rates applied to their
respective domestic and foreign financial results. The effective tax rate
for the first quarter of fiscal 1999 was 43.1%. The first quarter fiscal
1998 income tax provision mainly reflects taxes on U.S. income, as the
Canadian income tax expense was principally offset by the reversal of its
deferred tax asset valuation allowance. During the first quarter of fiscal
1998, 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 for the
first quarter of fiscal 1998. Although Canada generated pretax earnings in
the first quarter of fiscal 1998, the Company was unable to conclude that
the Canadian deferred tax assets were more likely than not to be realized.
-14-
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. During the fourth quarter of
fiscal 1998, the Company determined that due to the actions taken as part of
its strategic initiatives it was more likely than not that the deferred tax
asset would be realized. Accordingly, the Company reversed the remaining
portion of the valuation allowance amounting to approximately $60 million
during the fourth quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the first quarter with working capital of $43 million
compared to $90 million at the beginning of the fiscal year. The Company
had cash and short-term investments aggregating $126 million at the end of
the first quarter of fiscal 1999 compared to $137 million as of fiscal 1998
year end. Short-term investments were approximately $28 million and $25
million at June 19, 1999 and February 27, 1999, respectively, which were
primarily invested in commercial paper.
The Company has an unsecured five year $500 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. $35 million at June 19, 1999). As
of June 19, 1999, the Company had $83 million of borrowings under the Credit
Agreement. Accordingly, as of June 19, 1999, the Company had $417 million
available under the Credit Agreement. Borrowings under the agreement bears
interest at the weighted average rate of 5.5% as of June 19, 1999 based on
the variable LIBOR pricing.
In addition to the Credit Agreement, the Company also has various
uncommitted lines of credit with numerous banks. As of June 19, 1999, the
Company had $191 million available in uncommitted lines of credit. There
were no outstanding borrowings of uncommitted lines of credit as of June 19,
1999.
The Company's Credit Agreement 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 19, 1999.
The Company's existing senior debt rating was Ba1 with Moody's Investors
Service and BBB- with Standard & Poor's Ratings Group. Rating changes could
affect the availability and cost of financing to the Company.
-15-
For the 16 weeks ended June 19, 1999, capital expenditures totaled $103
million, which included 10 new stores and 25 remodels and enlargements.
Currently, the Company expects to achieve its fiscal 1999 planned capital
expenditures of approximately $500 million. Accordingly, the Company
expects to have capital expenditures of approximately $397 million
throughout the remainder of fiscal 1999.
These available cash resources, together with cash generated from
operations, are sufficient for the Company's capital expenditure program,
mandatory scheduled debt repayments and dividend payments for fiscal 1999.
MARKET RISK
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company is exposed to market risk in the areas of interest rates and foreign
currency exchange rates.
Interest rates
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's debt obligations. The Company has no cash flow
exposure due to rate changes on its $575 million in notes as of June 19, 1999
and February 27, 1999, respectively. However, the Company does have cash
flow exposure on its committed and uncommitted bank lines of credit due to
its variable LIBOR pricing. Accordingly, as of June 19, 1999, a 1% change in
LIBOR will result in interest expense fluctuating approximately $0.8 million.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. Based upon historical Canadian currency
movement, the Company does not believe that reasonably possible near-term
change in the Canadian currency of 10% will result in a material effect on
future earnings, financial position or cash flows of the Company.
The Company entered into a five year cross-currency swap agreement to hedge
five year notes in Canada that are denominated in U.S. dollars. The Company
does not have any currency risk regarding the Canadian five year notes. The
Company is exposed to currency risk in the event of default by the
counterparty. Such default is remote, as the counterparty is a widely
recognized and reputable investment banker. The fair value of the cross-
currency swap agreement was favorable to the Company by $5.3 million and $6.9
million as of June 19, 1999 and February 27, 1999, respectively. A 10%
change in Canadian exchange rates would have resulted in the fair value
fluctuating approximately $6.8 million at both June 19, 1999 and June 20,
1998.
-16-
YEAR 2000 COMPLIANCE
The Company has formed an ongoing task force to review the entire range of
the Company's operations relating to 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") and non-IT areas assessment is complete. The
current estimate of the remediation effort (including new programs and
components) is approximately 85% complete in the IT area and 60% in the non-
IT area. Testing of the systems and implementation of renovated and new
systems are currently in progress. A number of renovated and new systems that
are Year 2000 compliant are currently being used in operations.
The costs to address the Company's Year 2000 issues are estimated to be
approximately $10 million. Approximately $5.5 million of these costs have
been incurred as of June 19, 1999. The Company will incur additional capital
expenditures of approximately $5 million for new equipment during fiscal 1999
to replace equipment that is not 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 be remediated 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. The Company has
inventoried equipment with potential embedded chips and is in the process of
replacing the affected chips or microprocessors or purchasing new equipment
that is compliant. 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.
-17-
With respect to contingencies, a program has been 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. 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.
-18-
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 13, 1999, there
were 36,773,692 shares or 96.0% of the 38,290,716 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 97.1% of the shares present. Deloitte & Touche LLP was re-
elected as the Company's independent auditor by at least 99.8% of
the shares present.
The 1998 Long Term Incentive and Share Award Plan approved by a
majority of Shareholders of the Company at its Annual Meeting of
Shareholders held July 13, 1999 is incorporated by reference. The
Plan was approved by 72.9% of the shares voted which totaled
34,049,532 shares.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
-19-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
Date: July 30, 1999 By: /s/ Kenneth A. Uhl
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
-20-
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GREAT
ATLANTIC & PACIFIC TEA COMPANY, INC. 10-Q FOR THE 16 WEEK PERIOD ENDED JUNE 19,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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<CURRENT-ASSETS> 1142598
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<INTEREST-EXPENSE> 24394
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