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 June 17, 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 June 17, 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)
16 Weeks Ended
June 17, June 19,
2000 1999
---------- ----------
Sales $ 3,199,820 $3,113,722
Cost of merchandise sold (2,280,475) (2,242,133)
---------- ----------
Gross margin 919,345 871,589
Store operating, general and
administrative expense (881,532) (881,299)
---------- ----------
Income (loss) from operations 37,813 (9,710)
Interest expense (28,936) (24,394)
Interest income 1,864 1,778
---------- ----------
Income (loss) before income taxes 10,741 (32,326)
(Provision) benefit for income taxes (5,157) 12,780
---------- ----------
Net income (loss) $ 5,584 $ (19,546)
========== ==========
Earnings per share:
Net income (loss) per share-basic
and diluted $ .15 $ (.51)
========== ==========
Weighted average number of
common shares outstanding 38,347,216 38,319,015
Common stock equivalents 47,262 94,442
---------- ----------
Weighted average number of
common and common equivalent
shares outstanding 38,394,478 38,413,457
========== ==========
See Notes to Quarterly Report.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
---------------------------------------------------
COMPREHENSIVE INCOME (LOSS)
---------------------------
(Dollars in thousands, except 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
------ ------- ------ -------- ------- -------
First Quarter FY 2000
---------------------
Balance at beginning
of period
38,367,216 shares $38,367 $457,101 $(441) $411,861 $(60,696)$846,192
Net income 5,584 5,584
Other Comprehensive
Income:
Foreign Currency
Translation Adjustment (1,279) (1,279)
Minimum Pension
Liability Adjustment 2,682 2,682
Forfeiture of Restricted
Stock Grants (20) (631) 441 (210)
Cash Dividends
($.10 per share) (3,835) (3,835)
------- -------- ----- -------- -------- -------
Balance at end of
period $38,347 $456,470 $ - $413,610 $(59,293) $849,134
======= ======== ===== ======== ======== ========
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First Quarter FY 1999
---------------------
Balance at beginning
of period
38,290,716 shares $38,291 $454,971 $ - $413,034 $(69,039) $837,257
Net loss (19,546) (19,546)
Other Comprehensive
Income:
Foreign Currency
Translation
Adjustment 3,784 3,784
Exercise of Stock Options
34,250 shares 34 901 935
Cash Dividends
($.10 per share) (3,829) (3,829)
------- -------- ------ -------- -------- --------
Balance at end of
period $38,325 $455,872 $ - $389,659 $(65,255)$818,601
======= ======== ====== ======== ======== ========
Comprehensive Income (Loss)
---------------------------
First Quarter First Quarter
FY 2000 FY 1999
-------------- -------------
Net income (loss) $5,584 $(19,546)
Foreign currency
translation adjustment (1,279) 3,784
Minimum pension liability
adjustment 2,682 -
------ --------
Total Comprehensive
Income (Loss) $6,987 $(15,762)
====== ========
See Notes to Quarterly Report.
-3-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
June 17, 2000 Feb. 26, 2000
------------- -------------
(Unaudited)
ASSETS
------
Current assets:
Cash and short-term investments $ 107,115 $ 124,603
Accounts receivable 190,153 227,078
Inventories 798,890 791,150
Prepaid expenses and other assets 77,315 80,052
---------- ----------
Total current assets 1,173,473 1,222,883
---------- ----------
Property:
Property owned 1,845,259 1,789,662
Property leased 91,515 94,146
---------- ----------
Property-net 1,936,774 1,883,808
Other assets 222,314 228,834
---------- ----------
Total Assets $3,332,561 $3,335,525
========== ==========
See Notes Quarterly Report.
-4-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
June 17, 2000 Feb. 26, 2000
-------------- -------------
(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
Current liabilities:
Current portion of long-term debt $ 3,543 $ 2,382
Current portion of obligations under
capital leases 11,436 11,327
Accounts payable 560,426 583,142
Book overdrafts 133,015 112,465
Accrued salaries, wages and benefits 148,127 155,649
Accrued taxes 62,469 51,611
Other accruals 205,364 208,002
---------- ----------
Total current liabilities 1,124,380 1,124,578
---------- ----------
Long-term debt 890,420 865,675
---------- ----------
Obligations under capital leases 114,315 117,870
---------- ----------
Other non-current liabilities 354,312 381,210
---------- ----------
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 (59,293) (60,696)
Retained earnings 413,610 411,861
---------- ----------
Total shareholders' equity 849,134 846,192
---------- ----------
Total liabilities and shareholders'
equity $3,332,561 $3,335,525
========== ==========
See Notes to Quarterly Report.
-5-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
16 Weeks Ended
June 17, 2000 June 19, 1999
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,584 $(19,546)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Store/Facilities exit charge (reversal)
and asset write-off (3,061) 27,920
Environmental charge 3,029 -
Depreciation and amortization 76,648 69,966
Deferred income tax provision (benefit) 3,725 (16,397)
Gain on disposal of owned property (1,735) (144)
Decrease in receivables 34,438 31,843
(Increase) decrease in inventories (9,386) 62,993
Decrease in prepaid expenses
and other current assets 2,587 1,375
Decrease (increase) in other assets 526 (791)
Decrease in accounts payable (20,768) (14,300)
Decrease in accrued salaries,
wages and benefits (4,172) (3,460)
Increase in accrued taxes 8,672 6,235
Decrease in other accruals
and other liabilities (25,465) (3,696)
Other operating activities, net (1,296) (1,875)
--------- ---------
Net cash provided by operating activities 69,326 140,123
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (141,463) (103,009)
Proceeds from disposal of property 15,911 58,460
--------- ---------
Net cash used in investing activities (125,552) (44,549)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt (12,900) (23,100)
Proceeds under revolving lines of credit 60,000 20,063
Payments on revolving lines of credit (30,000) (67,000)
Proceeds from long-term borrowings 9,906 -
Payments on long-term borrowings (1,093) (1,615)
Principal payments on capital leases (3,392) (3,588)
Increase (decrease) in book overdrafts 20,740 (29,234)
Proceeds from stock options exercised - 935
Cash dividends (3,835) (3,829)
--------- ---------
Net cash provided by (used in)
financing activities 39,426 (107,368)
Effect of exchange rate changes on
cash and short-term investments (688) 1,243
--------- ---------
NET DECREASE IN CASH AND
SHORT-TERM INVESTMENTS (17,488) (10,551)
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD 124,603 136,810
--------- ---------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 107,115 $ 126,259
========= =========
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 16 week period ended June
17, 2000 (first quarter of fiscal 2000) and June 19, 1999 (first quarter
of fiscal 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 first quarter 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 June 17, 2000, the Company served 62 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 $188 million and $144 million for the
16 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.
Included in other assets are franchising business receivables, net of
allowance for doubtful accounts, amounting to approximately $54.6 million
and $53.4 million as of June 17, 2000 and February 26, 2000,
respectively.
The Company holds as assets inventory notes collateralized by the
inventory in the stores and equipment lease receivables collateralized by
-7-
the equipment in the stores. The current portion of the inventory notes
and equipment leases, net of allowance for doubtful accounts, amounting
to approximately $4.9 million and $4.1 million are included in accounts
receivable at June 17, 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
applying generally accepted accounting principles to the large number of
-8-
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. No additional
charges were recorded in the first quarter 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".
The Company paid $25 million of the total net severance charges from the
time of the original charges through the first 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.
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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) 1,686 - - - 1,686
Utilization (5) (11,316) - (1,847) (404) (13,567)
Adjustment (3) - - - (3,061) (3,061)
--------- -------- ------- ------- --------
Reserve Balance at
June 17, 2000 $ 93,823 $ - $ 5,653 $ 102 $ 99,578
========= ======== ======= ======= ========
(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"
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
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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 $1.7 million to store occupancy during the
first quarter of fiscal 2000 represents the present value of accrued
interest related to lease obligations.
(5) Store occupancy utilization of $11.3 million and facilities
occupancy of $0.4 million represent lease and other occupancy
payments made during the first quarter of fiscal 2000.
Based upon current available information, Management evaluated the
reserve balance of $99.6 million as of June 17, 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 June 17, 2000, the Company has closed all 34 stores in the Atlanta,
Georgia market and 131 of the 132 other stores, including all 31 stores
in the Richmond, Virginia market. The remaining store is in the process
of being disposed of.
At June 17, 2000, $28.2 million of the reserve is included in "Other
accruals" and $71.4 million 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 and the 34 Atlanta stores which
the Company has exited. The operating results of these stores are as
follows:
(In thousands) 16 Weeks Ended
-------------- ----------------------
June 17, June 19,
2000 1999
-------- --------
Sales $ 214 $163,995
======== ========
Operating Loss $ (67) $(21,459)
======== ========
-12-
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.
Interim information on segments is as follows:
(In thousands)
U.S. Canada Total
First Quarter Fiscal 2000 Retail Retail Wholesale Company
------------------------- ---------- -------- --------- ----------
Sales $2,485,844 $525,716 $188,260 $3,199,820
Depreciation and amortization 67,106 9,542 - 76,648
Operating income 21,204 10,315 6,294 37,813
Interest expense (24,424) (3,675) (837) (28,936)
Interest income 14 698 1,152 1,864
(Loss) income before taxes (3,206) 7,338 6,609 10,741
-13-
Total assets 2,710,089 540,558 81,914 3,332,561
Capital expenditures 120,678 20,785 - 141,463
U.S. Canada Total
First Quarter Fiscal 1999 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) 4,842 3,922 (9,710)
Interest expense (20,265) (3,554) (575) (24,394)
Interest income 33 805 940 1,778
(Loss) income before taxes (38,706) 2,093 4,287 (32,326)
Total assets 2,480,468 506,108 58,603 3,045,179
Capital expenditures 88,089 14,920 - 103,009
8) COMMITMENTS AND CONTINGENCIES
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
June 17, 2000 to be approximately $3 million on an undiscounted basis.
As of June 17, 2000, $3 million had been accrued and is included in
"Other non-current liabilities" in the Consolidated Balance Sheets.
-14-
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 17, 2000
----------------------------
OPERATING RESULTS
Sales for the first quarter ended June 17, 2000 of $3.2 billion increased
$86 million or 2.8% from the prior year first quarter amount. The increase
is attributable to the opening of 44 stores in new locations, excluding
replacement stores, since the beginning of fiscal 1999, which added
approximately $185 million or 5.9% to sales in the first quarter of fiscal
2000. Wholesale sales to the franchised stores increased $44 million, which
increased total Company sales by 1.5%. Same store sales also added $68
million ("Same Store Sales" referred to herein include replacement stores)
to the net sales increase. The increase in the Canadian exchange rate also
improved sales by $6 million or 0.2%. These increases were partially offset
by the closure of 138 stores, excluding replacement stores, since the
beginning of the first quarter of fiscal 1999, which reduced total sales by
approximately $215 million or 6.9% in the first quarter of fiscal 2000. The
Company's Compass Foods Division also experienced a reduction in sales of
approximately $2 million.
Average weekly sales per supermarket were approximately $257,300 in the
first quarter of fiscal 2000 versus $233,000 for the corresponding period of
the prior year, a 10.4% increase. Same store sales for Canadian operations
increased 3.7% from the prior year and same store sales for U.S. operations
increased 2.2% from the prior year.
Gross margin as a percent of sales increased 74 basis points to 28.73% in
the first quarter of fiscal 2000 from 27.99% for the first quarter of fiscal
1999. Margins were negatively impacted during the first quarter of fiscal
1999, due to accelerated inventory markdowns in stores that were identified
for closure under Project Great Renewal and the Atlanta market exit ("GR
I"). The gross margin dollar increase of $48 million resulted from an
increase in the gross margin rate of $24 million, an increase in sales
volume of $23 million as well as an increase of $1 million in the Canadian
exchange rate. The U.S. operations gross margin increase of $32 million
results primarily from an increase in gross margin rate. The Canadian
operations gross margin increase of $16 million results from an increase of
$19 million in sales volume, an increase of $1 million in the Canadian
exchange rate partially offset by a decrease of $4 million in the gross
margin rate.
Store operating, general and administrative expense was $882 million for the
16 weeks ended June 17, 2000 compared to $881 million for the corresponding
period in the prior year. As a percentage of sales, store operating general
and administrative expense decreased from 28.30% in fiscal 1999 to 27.55% in
fiscal 2000.
-15-
The expense for the first quarter of fiscal 1999 includes approximately $83
million relating to GR I, including severance, store closure and
professional fees.
The expense for the first quarter of fiscal 2000 includes approximately $17
million relating to the Company's Great Renewal - Phase II supply chain and
business process initiative. Such costs include primarily professional
consulting fees and salaries and related benefits of employees working full-
time on the initiative. Also included in the fiscal 2000 expense is
approximately $3 million of estimated environmental clean up costs for a non-
retail property. Partially offsetting the fiscal 2000 expenses is 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 non-recurring charges noted above, as a percentage of sales,
store operating, general and administrative expense increased from 26.69% in
the first quarter of fiscal 1999 to 27.02% in the first quarter of fiscal
2000. The increase of 33 basis points is primarily due to higher labor and
occupancy costs.
Interest expense increased $4.5 million or 18.6% 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 first quarter ended June 17, 2000 was $11
million compared to a loss before income taxes of $32 million for the
comparable period in the prior year for an increase of $43 million. The
income is attributable principally to a higher gross margin rate, partially
offset by the increase in interest expense.
The income tax provision/benefit recorded in the first quarter of fiscal
years 2000 and 1999 reflects the Company's estimated expected annual tax
rates applied to its respective domestic and foreign financial results.
The effective tax rate for the first quarter of fiscal 2000 was 48%.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the first quarter with working capital of $49 million
compared to $98 million at the beginning of the fiscal year. The Company
had cash and short-term investments aggregating $107 million at the end of
the first quarter of fiscal 2000 compared to $125 million as of fiscal 1999
year end. Short-term investments were approximately $8 million and $27
million at June 17, 2000 and February 26, 2000, respectively. The decrease
in working capital is attributable primarily to a decrease in accounts
receivable as well as a decrease in cash and short-term investments.
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-
16 stores, (6 in the United States and 10 in Canada) and for working
capital and general corporate purposes.
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. 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. $34 million at June 17, 2000). As
of June 17, 2000, the Company had $90 million of borrowings under the Credit
Agreement. Accordingly, as of June 17, 2000, the Company had $409 million
available under the Credit Agreement. Borrowings under the agreement bears
interest at the weighted average rate of 7.11% as of June 17, 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 June 17, 2000, the Company had $14 million outstanding and $146 million
available in uncommitted lines of credit.
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. Additionally, the Company has
U.S. bank borrowings of $87 million. Both the Notes and the U.S. bank
borrowings 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 June 17, 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 June 17, 2000.
The Company's existing senior debt rating was Ba1 with negative implications
with Moody's Investors Service and BBB- on credit watch with negative
implications with Standard & Poor's Ratings Group as of June 17, 2000.
Rating changes could affect the availability and cost of financing to the
Company.
For the 16 weeks ended June 17, 2000, capital expenditures totaled $141
million, which included 14 new stores and 13 remodels and enlargements.
Capital expenditures for the first quarter of fiscal 2000 also included
approximately $10 million of purchased software relating to Great Renewal -
Phase II. Capital expenditures are expected to continue at a similar rate
over the remainder of the year.
-17-
The Company believes that its current cash resources, including the funds
available under the Credit Agreement, together with cash generated from
operations, will be sufficient for the Company's 2000 Great Renewal - Phase
II and other capital expenditure programs, mandatory scheduled debt
repayments and dividend payments throughout fiscal 2000. The Company is
also considering real estate lease financing to supplement its current 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 June 17, 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 June 17, 2000, a 1% change
in LIBOR would result in interest expense fluctuating approximately $1
million per year.
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 investment banker. The fair value of the cross-currency swap
agreement was favorable to the Company by $7.2 million and $4.6 million as of
June 17, 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 June 17, 2000.
-18-
YEAR 2000 COMPLIANCE
The Company reviewed the entire range of its operations relating to Year 2000
issues. Remediation and testing are complete for both information technology
("IT") and non-IT mission critical areas that required attention and
resources in order to be Year 2000 compliant.
The costs incurred to address the Company's Year 2000 issues were
approximately $10 million.
Although the Company has determined that its major vendors are Year 2000
compliant and the Company has not experienced any significant Year 2000
related issues with its vendors to date, there still is risk of possible
failures by vendors to respond to Year 2000 issues. The Company has a
contingency plan in place to mitigate the potential effects, if any, that may
arise out of such failures.
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.
-19-
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 judgment 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
have petitioned the Court for rehearing.
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 11, 2000, there
were 35,422,471 shares or 92.4% of the 38,347,216 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 92.6% 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.
Item 5. Other Information
-----------------
Effective July 14, 2000, Mr. Michael Larkin, Senior Executive Vice
President - Chief Operating Officer, is no longer employed by the
Company.
-20-
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits required by Item 601 of Regulation S-K
Management Compensation Agreements - Exhibit 10
(b) Reports on Form 8-K
None
-21-
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 31, 2000 By: /s/ Kenneth A. Uhl
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
-22-
