Conformed Copy
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 9, 2000 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 9, 2000
----- --------------------------------
Common stock - $1 par value 38,347,216 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)
12 Weeks Ended 28 Weeks Ended
Sept. 9, Sept. 11, Sept. 9, Sept. 11,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Sales $2,439,534 $2,284,380 $5,639,354 $5,398,102
Cost of merchandise sold (1,735,281) (1,623,079) (4,015,756) (3,865,212)
---------- ---------- ---------- ----------
Gross margin 704,253 661,301 1,623,598 1,532,890
Store operating, general and
administrative expense (691,844) (634,933) (1,573,376) (1,516,232)
---------- ---------- ---------- ----------
Income from operations 12,409 26,368 50,222 16,658
Interest expense (22,132) (17,910) (51,068) (42,304)
Interest income 1,426 1,561 3,290 3,339
---------- ---------- ---------- ----------
(Loss) income before
income taxes (8,297) 10,019 2,444 (22,307)
Benefit (provision) for
income taxes 2,923 (4,641) (2,234) 8,139
---------- ---------- ---------- ----------
Net (loss) income $ (5,374) $ 5,378 $ 210 $ (14,168)
========== ========== ========== ==========
(Loss) earnings per share:
Net (loss) income per share -
basic and diluted $ (.14) $ .14 $ .01 $ (.37)
========== ========== ========== ==========
Weighted average number of
common shares outstanding 38,347,216 38,358,284 38,347,216 38,335,948
Common stock equivalents - 221,806 - 137,615
---------- ---------- ---------- ----------
Weighted average number of
common and common equivalent
shares outstanding 38,347,216 38,580,090 38,347,216 38,473,563
========== ========== ========== ==========
See Notes to Quarterly Report.
-1-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY AND
---------------------------------------------------
COMPREHENSIVE (LOSS) INCOME
---------------------------
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Una- Accumu-
mortized lated
Value Other
Addi- of Re- Compre- Total
tional stricted hensive Share-
Common Paid-in Stock Retained Income holders'
Stock Capital Grant Earnings (Loss) Equity
------ ------- ------ -------- ------- -------
FY 2000 - 28 Week Period
------------------------
Balance at beginning
of period
38,367,216 shares $38,367 $457,101 $(441) $411,861 $(60,696)$846,192
Net income 210 210
Other comprehensive
income:
Foreign currency
translation adjustment (2,500) (2,500)
Minimum pension
liability adjustment 2,682 2,682
Forfeiture of restricted
stock grants (20) (631) 441 (210)
Cash dividends
($.10 per share) (7,670) (7,670)
------- -------- ----- -------- -------- -------
Balance at end of
period $38,347 $456,470 $ - $404,401 $(60,514) $838,704
======= ======== ===== ======== ======== ========
See Notes to Quarterly Report.
-2-
FY 1999 - 28 Week Period
------------------------
Balance at beginning
of period
38,290,716 shares $38,291 $454,971 $ - $413,034 $(69,039) $837,257
Net loss (14,168) (14,168)
Other comprehensive
income:
Foreign currency
translation
adjustment 2,478 2,478
Issuance of 20,000
shares of common
stock 20 631 (651) -
Exercise of stock options,
56,500 shares 56 1,499 1,555
Amortization of
restricted stock grant 150 150
Cash dividends
($.10 per share) (7,663) (7,663)
------- -------- ------- -------- -------- --------
Balance at end of
period $38,367 $457,101 $ (501) $391,203 $(66,561)$819,609
======= ======== ====== ======== ======== ========
Comprehensive (Loss) Income
---------------------------
12 Weeks Ended 28 Weeks Ended
Sept. 9, Sept. 11, Sept. 9, Sept. 11,
2000 1999 2000 1999
--------- --------- --------- ---------
Net (loss) income $(5,374) $5,378 $ 210 $(14,168)
Foreign currency
translation
adjustment (1,221) (1,306) (2,500) 2,478
Minimum pension liability
adjustment - - 2,682 -
--------- ------- -------- ---------
Total comprehensive
(loss) income $(6,595) $4,072 $ 392 $(11,690)
======== ======= ======== =========
See Notes to Quarterly Report.
-3-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands except share amounts)
Sept. 9, 2000 Feb. 26, 2000
------------- -------------
(Unaudited)
ASSETS
------
Current assets:
Cash and short-term investments $ 96,394 $ 124,603
Accounts receivable 191,032 227,078
Inventories 801,034 791,150
Prepaid expenses and other assets 77,817 80,052
---------- ----------
Total current assets 1,166,277 1,222,883
---------- ----------
Property:
Property owned 1,883,836 1,789,662
Property leased 92,164 94,146
---------- ----------
Property-net 1,976,000 1,883,808
Other assets 220,749 228,834
---------- ----------
Total assets $3,363,026 $3,335,525
========== ==========
See Notes to Quarterly Report.
-4-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands except share amounts)
Sept. 9, 2000 Feb. 26, 2000
------------- -------------
(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
Current liabilities:
Current portion of long-term debt $ 7,042 $ 2,382
Current portion of obligations under
capital leases 11,644 11,327
Accounts payable 566,891 583,142
Book overdrafts 125,034 112,465
Accrued salaries, wages and benefits 158,968 155,649
Accrued taxes 61,763 51,611
Other accruals 202,473 208,002
---------- ----------
Total current liabilities 1,133,815 1,124,578
---------- ----------
Long-term debt 941,383 865,675
---------- ----------
Obligations under capital leases 114,178 117,870
---------- ----------
Other non-current liabilities 334,946 381,210
---------- ----------
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 38,347,216 and 38,367,216
shares, respectively 38,347 38,367
Additional paid-in capital 456,470 457,101
Unamortized value of
restricted stock grant - (441)
Accumulated other comprehensive loss (60,514) (60,696)
Retained earnings 404,401 411,861
---------- ----------
Total shareholders' equity 838,704 846,192
---------- ----------
Total liabilities and shareholders'
equity $3,363,026 $3,335,525
========== ==========
See Notes to Quarterly Report.
-5-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)
(Unaudited)
28 Weeks Ended
Sept. 9, 2000 Sept. 11, 1999
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 210 $(14,168)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Store/Facilities exit charge (reversal)
and asset write-off (3,061) 31,347
Environmental charge 3,029 -
Depreciation and amortization 135,451 122,302
Deferred income tax provision (benefit) 376 (24,019)
Gain on disposal of owned property (1,648) (1,240)
Decrease in receivables 33,289 20,839
(Increase) decrease in inventories (12,344) 64,157
(Increase) in prepaid expenses
and other current assets (2,413) (393)
(Increase) decrease in other assets (2,075) 926
(Decrease) in accounts payable (13,450) (57,852)
Increase (decrease) in accrued salaries,
wages and benefits 6,165 (1,428)
Increase in accrued taxes 7,974 12,424
(Decrease) increase in other accruals
and other liabilities (33,450) 6,669
Other operating activities, net 80 (2,410)
--------- ---------
Net cash provided by operating activities 118,133 157,154
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (241,643) (256,766)
Proceeds from disposal of property 16,538 68,116
--------- ---------
Net cash used in investing activities (225,105) (188,650)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt 18,000 (23,100)
Proceeds under revolving lines of credit 90,000 85,000
Payments on revolving lines of credit (45,000) (215,000)
Proceeds from long-term borrowings 19,454 200,110
Payments on long-term borrowings (2,086) (2,834)
Principal payments on capital leases (5,973) (6,227)
Deferred financing fees - (6,298)
Increase in book overdrafts 12,913 12,549
Proceeds from stock options exercised - 1,555
Cash dividends (7,670) (7,663)
--------- ---------
Net cash provided by financing activities 79,638 38,092
Effect of exchange rate changes on
cash and short-term investments (875) 989
--------- ---------
NET (DECREASE) INCREASE IN CASH AND
SHORT-TERM INVESTMENTS (28,209) 7,585
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD 124,603 136,810
--------- ---------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 96,394 $ 144,395
========= =========
See Notes to Quarterly Report.
-6-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
1) BASIS OF PRESENTATION
The consolidated financial statements for the 12 and 28 week periods
ended September 9, 2000 and September 11, 1999 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 herein. 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 1999 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 provision/benefit recorded for the 28 week period of
fiscal years 2000 and 1999 reflects the Company's estimated expected
annual tax rates applied to its respective domestic and foreign financial
results.
3) WHOLESALE FRANCHISE BUSINESS
As of September 9, 2000, the Company served 67 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 $146 million and $116 million for the
second quarters of fiscal 2000 and 1999, respectively, and $334 million
and $259 million for the 28 week period ended in fiscal years 2000 and
1999, 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 primarily
represents the reimbursement of costs incurred to provide such services.
The Company holds as assets inventory notes collateralized by the
inventory in the stores and equipment lease receivables collateralized by
the equipment in the stores. The current portion of the inventory notes
and equipment leases, net of allowance for doubtful accounts, amounting
-7-
to approximately $4.5 million and $4.1 million are included in accounts
receivable at September 9, 2000 and February 26, 2000, respectively. The
long-term portion of the inventory notes and equipment leases, net of
allowance for doubtful accounts, amounting to approximately $56.5 million
and $53.4 million are included in other assets at September 9, 2000 and
February 26, 2000, 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
results 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 NOT YET ADOPTED
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 Consolidated Balance Sheets 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
Statements of Consolidated Operations.
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.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Financial Instruments and Certain Hedging Activities - An
Amendment of FASB Statement No. 133". This Statement amends the
accounting and reporting standards of SFAS 133 for certain derivative
instruments, for certain hedging activities and for decisions made by the
FASB relating to the Derivatives Implementation Group ("DIG") process.
Certain decisions arising from the DIG process that required specific
amendments to SFAS 133 were incorporated into this Statement. The
Company plans to adopt SFAS 133 and SFAS 138 in the first quarter of
fiscal 2001. The Company is currently evaluating the impact this
pronouncement will have on the Consolidated Financial Statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 was issued to provide guidance in
-8-
applying generally accepted accounting principles to the large number of
revenue recognition issues that registrants encounter, including
nonrefundable, up-front fees and the disclosure of judgements as to the
appropriateness of the principles relating to revenue recognition
accounting policies. Since the issuance of SAB 101, the Staff has
received requests from a number of groups asking for additional time to
determine the effects, if any, on registrants' revenue recognition
practices and as such, the SEC has delayed the implementation date of SAB
101 until no later than the fourth quarter of fiscal years beginning
after December 15, 1999. The Company has evaluated the impact of this
Staff Accounting Bulletin and has concluded that it will have no effect
on the Consolidated Financial Statements. Revenue is recognized at the
point of sale for retail sales. Vendor allowances and credits that
relate to the Company's buying and merchandising activities are
recognized as earned.
In May 2000, the Emerging Issues Task Force ("Task Force") issued
No. 00-14 "Accounting for Certain Sales Incentives". The Task Force
reached a consensus on several issues involving the accounting and income
statement classification of rebates, coupons and other discounts. The
Company has evaluated the impact of this issue and has concluded that it
will have no effect on the accounting or classification of sales
incentives since coupons are recorded upon redemption as a reduction of
sales.
5) STORE AND FACILITIES EXIT COSTS - GREAT RENEWAL - PHASE I
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.
As a result of the above assessment, in the third quarter of fiscal 1998,
the Company decided to exit two warehouse facilities and a coffee plant
in the U.S. 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.
As of February 27, 1999, the Company had closed and terminated operations
with respect to the two warehouses and the coffee plant. The volume
associated with the 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
-9-
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 charge in
the fourth quarter of fiscal 1998 of approximately $215 million.
This $215 million charge consisted of $8 million of severance (including
pension withdrawal obligations), $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 stores, the Company transferred those assets
to continuing stores. The Company plans to scrap fixed assets that could
not be transferred, and accordingly, the write-down was calculated based
upon an estimated scrap value. This fourth quarter charge of $215 million
was reduced by approximately $2 million in fiscal 1998 due to changes in
estimates of pension withdrawal liabilities and fixed asset write-downs
from the time the original charge was recorded.
In addition to the charges recorded in 1998, there were other charges
related to the plan which could not be accrued at February 27, 1999
because they did not meet the criteria for accrual under EITF 94-3. Such
costs have been expensed as incurred as the plan was being executed.
During fiscal 1999, the Company recorded an additional pretax charge of
$11 million for severance related to the 132 stores of which $9 million
was recorded in the first half of fiscal 1999. No additional charges
were recorded during the 28 week period of fiscal 2000.
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, at the time of the
announcement, the Company recorded a fiscal 1999 first quarter net pretax
charge of approximately $5 million. This charge is comprised of severance
of $6 million, future lease commitments of $11 million, partially offset
by a $12 million gain related to the disposition of fixed and intangible
assets. The net charge was included in "Store operating, general and
administrative expense".
-10-
The Company paid $27 million of the total net severance charges from the
time of the original charges through the second quarter of fiscal 2000
which resulted from the termination of approximately 3,400 employees.
The remaining individual severance payments will be made by the end of
fiscal 2000.
The following reconciliation summarizes the activity related to the
aforementioned charges since the beginning of fiscal 1999:
Severance
Store Fixed and Facilities
(Dollars in thousands)Occupancy Assets Benefits Occupancy Total
--------------------- --------- -------- -------- ---------- ---------
Reserve Balance at
Feb. 27, 1999 $114,532 $ - $10,066 $ 4,038 $128,636
Addition (1) 15,730 - 17,060 3,188 35,978
Utilization (4,614)(2) (295) (19,626) (3,659) (28,194)
Adjustment (3) (22,195) 295 - - (21,900)
Reserve Balance at --------- -------- ------- ------- --------
Feb. 26, 2000 103,453 - 7,500 3,567 114,520
Addition (4) 2,873 - - - 2,873
Utilization (5) (18,409) - (3,663) (463) (22,535)
Adjustment (3) - - - (3,061) (3,061)
--------- -------- ------- ------- --------
Reserve Balance at
Sept. 9, 2000 $ 87,917 $ - $ 3,837 $ 43 $ 91,797
========= ======== ======= ======= ========
(1) The fiscal 1999 addition represents an increase to the store
occupancy reserve for the present value interest accrued ($7.4
million), the additional severance cost ($11.5 million) and the cost
of exiting the Atlanta market (including store occupancy of $8.3
million, severance of $5.6 million and facilities costs of $3.2
million).
(2) Store occupancy utilization for fiscal 1999 is comprised of
$29.6 million of lease and other occupancy payments for the period,
net of $25.0 million of net proceeds on the assignment of leases
which was considered in the original charge recorded during fiscal
1998.
(3) At each balance sheet date, Management assesses the adequacy of the
reserve balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. As a result, in the third
quarter of fiscal 1999, the Company recorded a net reduction in "Store
operating, general and administrative expense"
-11-
of $21.9 million to reverse a portion of the $215 million
restructuring charge recorded in fiscal 1998. This amount
represents a $22.2 million reduction in "Store operating, general
and administrative expense" for lower store occupancy costs
resulting primarily from earlier than anticipated lease terminations
and subleases. The credit is partially offset by $0.3 million of
additional fixed asset write-downs resulting from lower than
anticipated proceeds from the sale of fixed assets. Additionally,
in the first quarter of fiscal 2000, the Company recorded a net
reduction in "Store operating, general and administrative expense"
of $3.1 million to reverse a portion of the $215 million
restructuring charge recorded in fiscal 1998. The reversal is a
result of a change in estimate resulting from the sale of one of the
Company's warehouses sold during the first quarter of fiscal 2000.
(4) The addition of $2.9 million to store occupancy during the
first two quarters of fiscal 2000 represents the present value of
accrued interest related to lease obligations.
(5) Store occupancy utilization of $18.4 million and facilities
occupancy of $0.5 million represent lease and other occupancy
payments made during the 28 week period ended September 9, 2000.
Based upon current available information, Management evaluated the
reserve balance of $91.8 million as of September 9, 2000 and has
concluded that it is adequate. The Company will continue to monitor the
status of the vacant properties and further adjustments to the reserve
balance may be recorded in the future, if necessary.
As of September 9, 2000, the Company has closed 165 stores, including 34
stores in the Atlanta, Georgia market and 31 stores in the Richmond,
Virginia market.
At September 9, 2000, approximately $28 million of the reserve is
included in "Other accruals" and the remaining amount is included in
"Other non-current liabilities" in the Consolidated Balance Sheets.
Included in the Statements of Consolidated Operations are the operating
results of the 132 underperforming stores (including 31 stores in the
Richmond, Virginia market) and the 34 Atlanta stores which the Company
has exited. The operating results of these stores are as follows:
-12-
(In thousands) 12 Weeks Ended 28 Weeks Ended
-------------- ----------------------- ----------------------
Sept. 9, Sept. 11, Sept. 9, Sept. 11,
2000 1999 2000 1999
-------- --------- -------- ----------
Sales $ 163 $21,027 $ 377 $185,022
======== ======== ======== ========
Operating Loss $ (4) $(4,672) $ (71) $(26,131)
======== ======== ========= ========
6) DEFINED BENEFIT PLAN TRANSFER
During the year ended February 25, 1995, the Company's Canadian
subsidiary and the United Food & Commercial Workers International Union,
Locals 175 and 633, entered into an agreement resulting in the
amalgamation of three of the Company's Canadian defined benefit pension
plans with the Canadian Commercial Workers Industry Pension Plan
("CCWIPP"), retroactive to July 1, 1994. The agreement was subject to
the approval of the CCWIPP trustees and the appropriate regulatory
bodies. During the first quarter of fiscal 2000, the Company received
final approval of the agreement.
Under the terms of this agreement, CCWIPP assumed the assets and defined
benefit liabilities of the three pension plans and the Company is
required to make defined contributions to CCWIPP based upon hours worked
by employees who are members of CCWIPP. As a result of this transfer,
during the first quarter of fiscal 2000, the Company recorded a $0.4
million net expense and a $2.7 million adjustment to the minimum pension
liability.
7) OPERATING SEGMENTS
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 operation
that serves as the exclusive wholesaler to the Company's franchised
stores and serves as wholesaler to certain third party retailers.
The accounting policies for the segments are the same as those described
in the summary of significant accounting policies included in the
Company's Fiscal 1999 Annual Report. The Company measures segment
performance based upon operating profit.
-13-
Interim information on segments is as follows:
(Dollars in thousands)
12 Weeks Ended 28 Weeks Ended
---------------------- ----------------------
Sept. 9, Sept. 11, Sept. 9, Sept. 11,
2000 1999 2000 1999
--------- ----------- ---------- -----------
Sales
U.S. Retail $1,899,170 $1,806,056 $4,385,014 $4,292,967
Canada Retail 394,362 362,772 920,078 845,873
Canada Wholesale 146,002 115,552 334,262 259,262
---------- ---------- ---------- ----------
Total Company $2,439,534 $2,284,380 $5,639,354 $5,398,102
========== ========== ========== ==========
Depreciation and
amortization
U.S. Retail $ 51,281 $ 46,114 $ 118,387 $ 108,021
Canada Retail 7,522 6,222 17,064 14,281
Canada Wholesale - - - -
----------- --------- ---------- ----------
Total Company $ 58,803 $ 52,336 $ 135,451 $ 122,302
=========== ========= ========== ==========
Income from operations
U.S. Retail $ 2,268 $ 14,989 $ 23,472 $ (3,485)
Canada Retail 5,812 7,772 16,127 12,614
Canada Wholesale 4,329 3,607 10,623 7,529
----------- --------- ---------- ----------
Total Company $ 12,409 $ 26,368 $ 50,222 $ 16,658
=========== ========= ========== ==========
(Loss) income before
income taxes
U.S. Retail $ (16,441) $ 411 $ (19,647) $ (38,295)
Canada Retail 3,500 5,758 10,838 7,851
Canada Wholesale 4,644 3,850 11,253 8,137
----------- -------- ---------- ----------
Total Company $ (8,297) $ 10,019 $ 2,444 $ (22,307)
=========== ======== ========== ==========
Capital expenditures
U.S. Retail $ 82,211 $ 139,972 $ 202,889 $ 228,061
Canada Retail 17,969 13,785 38,754 28,705
Canada Wholesale - - - -
----------- --------- ---------- ----------
Total Company $ 100,180 $ 153,757 $ 241,643 $ 256,766
=========== ========= ========== ==========
-14-
Sept. 9, Feb. 26,
2000 2000
---------- ----------
Total assets
U.S. Retail $ 2,729,587 $2,684,624
Canada Retail 547,346 567,573
Canada Wholesale 86,093 83,328
----------- ----------
Total Company $ 3,363,026 $3,335,525
=========== ==========
8) ENVIRONMENTAL LIABILITY
During the first quarter of fiscal 2000, the Company became aware of
environmental issues at one of its non-retail real estate locations. The
Company obtained an environmental remediation report to enable it to
assess the potential environmental liability related to this property.
Factors considered in determining the liability included, among others,
the following: whether the Company had been designated as a potentially
responsible party, the number of potentially responsible parties
designated at the site, the stage of the proceedings and the available
environmental technology.
The Company has assessed the likelihood that a loss has been incurred at
this site as probable and based on findings included in remediation
reports and discussion with legal counsel, estimate a potential loss at
September 9, 2000 to be approximately $3 million on an undiscounted
basis. During the first quarter of fiscal 2000, $3 million was accrued
and is currently included in "Other non-current liabilities" in the
Consolidated Balance Sheets.
9 PROJECT FINANCING AGREEMENT
During the 28 weeks ended September 9, 2000, the Company entered into an
agreement with IBM Credit Corporation ("IBM Credit") whereby IBM Credit
will provide financing for software purchases and hardware leases
primarily relating to the Company's Great Renewal - Phase II supply chain
and business process initiative. Under this agreement, IBM Credit will
finance software purchases and hardware leases in the aggregate up to $71
million at an effective rate of 8.49% per annum. The purchases and
leases will occur from time to time over the next four years. The
Company is committed to make equal monthly payments of $1.4 million
through May 2005. Such payments are subject to change based upon the
timing and amount of funding from IBM Credit.
As of September 9, 2000, IBM Credit has funded $19.2 million for software
purchases and has leased hardware to the Company with a total fair market
value of $5.8 million. The leasing of the hardware under this agreement
is being accounted for as an operating lease in accordance with SFAS No.
13, "Accounting for Leases."
-15-
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 9, 2000
--------------------------------
OPERATING RESULTS
Sales for the second quarter ended September 9, 2000 of $2.4 billion
increased $155 million or 6.8% from the prior year second quarter amount.
The increase is detailed in the following table:
Increase/ Increase/
(Decrease) (Decrease)
$ %
---------- ----------
New stores (45) $152 6.7%
Same store sales 35 1.5
Wholesale sales 29 1.3
Canadian exchange rate 2 0.1
Closed stores (59) (63) (2.8)
---- -----
Total $155 6.8%
==== =====
Average weekly sales per supermarket were approximately $262,400 in the
second quarter of fiscal 2000 versus $246,700 for the corresponding period
of the prior year, an increase of 6.4%. Same store sales for Canadian
operations increased 3.4% from the prior year and same store sales for U.S.
operations increased 1.4% from the prior year.
Gross margin as a percent of sales decreased 8 basis points to 28.87% in the
second quarter of fiscal 2000 from 28.95% for the second quarter of fiscal
1999. The gross margin dollar increase of $43 million resulted from an
increase in sales volume which impacted gross margin by $44 million as well
as an increase of $1 million in the Canadian exchange rate offset by a
decrease in the gross margin rate which impacted gross margin by $2 million.
The U.S. operations gross margin increase of $34 million resulted from an
increase of $28 million due to higher sales volume and an increase of $6
million due to a higher gross margin rate. The Canadian operations gross
margin increase of $9 million resulted from an increase of $13 million due
to higher sales volume and an increase of $1 million in the Canadian
exchange rate partially offset by a decrease of $5 million due to a lower
gross margin rate.
Store operating, general and administrative ("SG&A") expense was $692
million for the second quarter of fiscal 2000 compared to $635 million for
the corresponding period in the prior year. As a percentage of sales, SG&A
expense increased from 27.79% in the second quarter of fiscal 1999 to 28.36%
-16-
in the second quarter of fiscal 2000.
The SG&A expense for the second quarter of fiscal 1999 included
approximately $23 million relating the Company's Great Renewal - Phase I
store closure initiatives ("GR I") as described in Footnote 5 of the
Company's Consolidated Financial Statements for the 12 and 28 week periods
ended September 9, 2000. These expenses consisted of approximately $12
million of non-recurring charges and approximately $11 million of store
operating, general and administrative expense of the stores identified for
closure.
The SG&A expense for the second quarter of fiscal 2000 included
approximately $17 million relating to the Company's Great Renewal - Phase II
supply chain and business process initiative ("GR II"). Such costs
consisted primarily of professional consulting fees and salaries including
related benefits of employees working full-time on the initiative.
Excluding the GR I and GR II charges noted above, as a percentage of sales,
SG&A expense increased from 27.03% in the second quarter of fiscal 1999 to
27.66% in the second quarter of fiscal 2000. The increase of 63 basis
points is primarily due to special litigation and severance charges as well
as higher labor and occupancy costs in fiscal 2000.
Interest expense increased $4.2 million or 23.57% from the corresponding
period of the prior year, primarily due to the issuance of $200 million
9.375% Senior Quarterly Interest Bonds on August 6, 1999 and increased
borrowings from banks.
The loss before income taxes for the second quarter ended September 9, 2000
was $8 million compared to income before income taxes of $10 million for the
comparable period in the prior year for a decrease of $18 million. The loss
was attributable principally to higher store operating, general and
administrative expense and increased interest expense.
The income tax provision/benefit recorded in the second quarter of fiscal
years 2000 and 1999 reflect the Company's estimated expected annual tax
rates applied to its respective domestic and foreign financial results. The
effective tax rate for the second quarter of fiscal 2000 was 35.2%.
-17-
MANAGEMENT'S DISCUSSION AND ANALYSIS
28 WEEKS ENDED SEPTEMBER 9, 2000
--------------------------------
OPERATING RESULTS
Sales for the 28 weeks ended September 9, 2000 of $5.6 billion increased
$241 million or 4.5% from the prior year. The increase is detailed in the
following table:
Increase/ Increase/
(Decrease) (Decrease)
$ %
---------- ----------
New stores (53) $337 6.2%
Same store sales 101 1.9
Wholesale sales 73 1.4
Canadian exchange rate 8 0.1
Closed stores (147) (278) (5.1)
---- -----
Total $241 4.5%
==== =====
Average weekly sales per supermarket were approximately $259,700 for the 28
week period of fiscal 2000 versus $238,600 for the corresponding period of
the prior year, an increase of 8.8%. Same store sales for Canadian
operations increased 3.9% from the prior year and same store sales for U.S.
operations increased 1.8% from the prior year.
Gross margin as a percent of sales increased 39 basis points to 28.79% for
the 28 week period of fiscal 2000 from 28.40% for the 28 week period of
fiscal 1999. Margins were negatively impacted during the 28 week period of
fiscal 1999 due to accelerated inventory markdowns in stores that were
identified for closure under GR I recorded in the first quarter of fiscal
1999. The gross margin dollar increase of $91 million resulted from an
increase in the gross margin rate which impacted gross margin by $23
million, an increase in sales volume which impacted gross margin by $66
million as well as an increase of $2 million in the Canadian exchange rate.
The U.S. operations gross margin increase of $67 million resulted from an
increase of $39 million due to a higher gross margin rate and $28 million
due to higher sales volume. The Canadian operations gross margin increase
of $24 million resulted from an increase of $32 million due to higher sales
volume and an increase of $2 million in the Canadian exchange rate partially
offset by a decrease of $10 million due to a lower gross margin rate.
SG&A expense was $1.6 billion for the 28 weeks ended September 9, 2000
compared to $1.5 billion for the corresponding period in the prior year. As
a percentage of sales, SG&A expense decreased from 28.09% in fiscal 1999 to
27.90% in fiscal 2000.
-18-
The SG&A expense for the 28 week period of fiscal 1999 included
approximately $106 million relating to GR I, including approximately $45
million of non-recurring charges and approximately $61 million of store
operating, general and administrative expense of the stores identified for
closure.
The SG&A expense for the 28 week period of fiscal 2000 included
approximately $34 million relating to GR II. Such costs included primarily
professional consulting fees and salaries including related benefits of
employees working full-time on the initiative. Also included in the fiscal
2000 expense was approximately $3 million of estimated environmental clean
up costs for a non-retail property. Partially offsetting the fiscal 2000
expense was a reversal of approximately $3.1 million of GR I charges
originally recorded in fiscal 1998 resulting from a change in estimate
related to the sale of one of the Company's warehouses sold during the first
quarter of fiscal 2000.
Excluding the charges noted above, as a percentage of sales, SG&A expense
increased from 26.84% for the 28 week period of fiscal 1999 to 27.30% for
the 28 week period of fiscal 2000. The increase of 46 basis points is
primarily due to special litigation and severance charges as well as higher
labor and occupancy costs in fiscal 2000.
Interest expense increased $8.8 million or 20.7% from the corresponding
period of the prior year, primarily due to the issuance of $200 million
9.375% Senior Quarterly Interest Bonds on August 6, 1999.
Income before income taxes for the 28 week period ended September 9, 2000
was $2 million compared to a loss before income taxes of $22 million for the
comparable period in the prior year, an increase of $24 million. The income
is attributable principally to a higher gross margin rate, partially offset
by the increases in store operating, general and administrative expense and
interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the second quarter with working capital of $32 million
compared to $98 million at the beginning of the fiscal year. The Company
had cash and short-term investments aggregating $96 million at the end of
the second quarter of fiscal 2000 compared to $125 million as of fiscal 1999
year end. There were no short-term investments at September 9, 2000. Short-
term investments were approximately $27 million at February 26, 2000. The
decrease in working capital is attributable primarily to decreases in cash
and short-term investments and accounts receivable.
On August 6, 1999, the Company issued $200 million aggregate principal
amount 9.375% Senior Quarterly Interest Bonds due August 1, 2039. The
Company used the net proceeds from the issuance of the bonds to repay
borrowings under its revolving credit facility, to finance the purchase of
16 stores, (6 in the United States and 10 in Canada) and for working capital
and general corporate purposes.
-19-
The Company has an unsecured five year $499 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. As of September 9, 2000, the Credit
Agreement was comprised of the U.S. credit agreement amounting to $465
million and the Canadian credit agreement amounting to C$50 million (U.S.
$34 million). As of September 9, 2000, the Company had $105 million of
borrowings under the Credit Agreement. Accordingly, as of September 9,
2000, the Company had $394 million available under the Credit Agreement.
Borrowings under the agreement bears interest at the weighted average rate
of 7.13% as of September 9, 2000 based on the variable LIBOR pricing.
In addition to the Credit Agreement, the Company also has various
uncommitted lines of credit with numerous banks totaling $160 million. As
of September 9, 2000, the Company had $45 million outstanding and $115
million available in uncommitted lines of credit.
As described in Footnote 9 of the Company's Consolidated Financial
Statements for the 12 and 28 week periods ended September 9, 2000, the
Company entered into an agreement with IBM Credit Corporation ("IBM Credit")
whereby IBM Credit will provide financing for software purchases and
hardware leases primarily related to GR II. Under this agreement, IBM
Credit will finance software purchases and hardware leases in the aggregate
up to $71 million at an effective rate of 8.49% per annum. As of September
9, 2000, IBM Credit has funded $19.2 million for software purchases and has
leased hardware to the Company with a total fair market value of $5.8
million.
The Company's Canadian subsidiary, The Great Atlantic & Pacific Company of
Canada, Limited, has outstanding $75 million of 5 year Notes denominated in
U.S. dollars that are due on November 1, 2000. These Notes, along with
borrowings under the credit agreement and uncommitted lines of credit have
been classified as long-term debt based on Management's intent and ability,
through the use of the Credit Agreement, to refinance such Notes and bank
borrowings on a long-term basis.
The Company has filed two Shelf Registration Statements dated January 23,
1998 and June 23, 1999, allowing it to offer up to $350 million of debt
and/or equity securities as of September 9, 2000 at terms determined by
market conditions at the time of sale.
The Company's loan agreements and certain of its notes contain various
financial covenants which require, among other things, minimum net worth and
maximum levels of indebtedness and lease commitments. The Company is in
compliance with all such covenants as of September 9, 2000.
The Company's existing senior debt rating was Ba1 with negative implications
with Moody's Investors Service and BB stable with Standard & Poor's Ratings
Group as of September 9, 2000. On September 7, 2000, Standard & Poor's
Ratings Group lowered its rating on the Company's debt to BB stable. This
rating change raises the cost of borrowing under the Credit Agreement by 20
basis points on the borrowed amount and 5 basis points on the entire
-20-
commitment. This change as well as future rating changes could affect the
availability and cost of financing to the Company.
For the 28 weeks ended September 9, 2000, capital expenditures totaled $242
million, which included 25 new stores and 35 remodels and enlargements.
Capital expenditures are expected to continue at a similar rate over the
remainder of the year.
The Company believes that its anticipated cash resources will be sufficient
for GR II and other capital expenditure programs, as well as mandatory
scheduled debt repayments throughout fiscal 2000. The Company is also
considering real estate lease financing to supplement its cash resources.
MARKET RISK
Market risk represents the risk of loss from adverse market changes that may
impact the consolidated financial position, results of operations or cash
flows of the Company. Among other possible market risks, the Company is
exposed to such 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 $775 million in notes as of September 9,
2000 because they are at fixed interest rates. 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 September 9, 2000, a
1% change in LIBOR would result in interest expense fluctuating approximately
$1.5 million per year.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. For the 12 and 28 week periods ended
September 9, 2000, a change in the Canadian currency of 10% would have
resulted in a fluctuation in net income of $0.4 million and $1.2 million,
respectively. The Company does not believe that a change in the Canadian
currency of 10% will have a material effect on the 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 investment banker. The fair value of the cross-currency swap
agreement was favorable to the Company by approximately $6.9 million and $4.6
-21-
million as of September 9, 2000 and February 26, 2000, respectively. A 10%
change in Canadian exchange rates would have resulted in the fair value
fluctuating approximately $6.8 million at September 9, 2000.
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 programs on satisfactory terms; supply or
quality control problems with the Company's vendors and changes in economic
conditions which affect the buying patterns of the Company's customers.
-22-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
A Georgia appellate court ruled against the Company's appeal of a
$4 million verdict in the Capital Graphics Advertising Agency, Inc.
case. Subsequent thereto, the Company has satisfied the judgement
in full.
The United States Circuit Court of Appeals for the Seventh Circuit
ruled in the Shirley A. Lang case, in favor of the Company, which
had previously won a unanimous jury verdict. The plaintiffs'
petition to the Court for rehearing has been denied.
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 in the first quarter ended
June 17, 2000, Form 10-Q report filed with the Commission.
Item 5. Other Information
-----------------
Effective August 26, 2000, Mr. George Graham, Executive Vice
President and Chief Merchandising Officer, was no longer employed
by the Company.
Effective July 14, 2000, Mr. Michael J. Larkin, Senior Executive
Vice President and Chief Operating Officer, was no longer employed
by the Company.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits required by Item 601 of Regulation S-K
Management Termination Agreement - Exhibit 10
(b) Reports on Form 8-K
None
-23-
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 24, 2000 By: /s/ Kenneth A. Uhl
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
-24-
