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 December 4, 1999 Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
----------------------------------------------
(Exact name of registrant as specified in charter)
Maryland 13-1890974
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive, Montvale, New Jersey 07645
- ------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 201-573-9700
------------
- -------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES XXX NO
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 4, 1999
----- -------------------------------
Common stock - $1 par value 38,367,216 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 40 Weeks Ended
Dec. 4, Dec. 5, Dec. 4, Dec. 5,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Sales $2,332,128 $2,344,400 $7,730,230 $7,753,035
Cost of merchandise sold (1,655,840) (1,664,686) (5,521,052) (5,513,730)
---------- ---------- ---------- ----------
Gross margin 676,288 679,714 2,209,178 2,239,305
Store operating, general and
administrative expense (620,204) (681,463) (2,136,436) (2,168,170)
---------- ---------- ---------- ----------
Income from operations 56,084 (1,749) 72,742 71,135
Interest expense (20,308) (16,212) (62,612) (53,025)
Interest income 1,269 1,549 4,608 5,186
---------- ---------- ---------- ----------
Income (loss) before
income taxes 37,045 (16,412) 14,738 23,296
(Provision) Benefit for
income taxes (15,691) 7,678 (7,552) (1,910)
---------- ---------- ---------- ----------
Net income (loss) $ 21,354 $ (8,734) $ 7,186 $ 21,386
========== ========== ========== ==========
Earnings (loss) per share:
Net income (loss) per share-
basic and diluted $ .56 $ (.23) $ .19 $ .56
========== ========== ========== ==========
Weighted average number of
common shares outstanding 38,367,216 38,306,716 38,345,329 38,289,616
Common stock equivalents 46,118 2,863 99,763 35,109
---------- ---------- ---------- ----------
Weighted average number of
common and common
equivalent shares
outstanding 38,413,334 38,309,579 38,445,092 38,324,725
========== ========== ========== ==========
See Notes to Quarterly Report on Page 8.
1
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
---------------------------------------------------
COMPREHENSIVE INCOME
---------------------------
(Dollars in thousands, except share amounts)
(Unaudited)
Una- Accumu-
mortized lated
Value Other
Addi- of Rest- Compre- Total
tional tricted hensive Share-
Common Paid-in Stock Retained Income holders'
Stock Capital Grant Earnings (Loss) Equity
------ ------- ------ -------- ------- -------
40 Week Period FY 1999
- ----------------------
Balance at February
28, 1999,
38,290,716 shares $38,291 $454,971 $ - $413,034 $(69,039) $837,257
Net Income 7,186 7,186
Other Comprehensive
Income:
Foreign Currency
Translation
Adjustment 2,767 2,767
Issuance of 20,000
Shares of Restricted
Common Stock 20 631 (651) -
Exercise of Stock
Options, 56,500 shares 56 1,499 1,555
Amortization of
Restricted Stock Grants 180 180
Cash Dividends
($.10 per share) (11,498) (11,498)
------- -------- ------ -------- -------- --------
Balance at December
4, 1999 $38,367 $457,101 $ (471) $408,722 $(66,272) $837,447
======= ======== ====== ======== ======== ========
See Notes to Quarterly Report on Page 8.
2
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
---------------------------------------------------
COMPREHENSIVE INCOME
---------------------------
(Dollars in thousands, except share amounts)
(Unaudited)
Una- Accumu-
mortized lated
Value Other
Addi- of Rest- Compre- Total
tional tricted hensive Share-
Common Paid-in Stock Retained Income holders'
Stock Capital Grant Earnings (Loss) Equity
------ ------- ------ -------- ------- -------
40 Week Period FY 1998
- ----------------------
Balance at March
1, 1998,
38,252,966 shares $38,253 $453,894 $ - $495,510 $(61,025) $926,632
Net Income 21,386 21,386
Other Comprehensive
Income:
Foreign Currency
Translation
Adjustment (13,098) (13,098)
Exercise of Stock
Options, 34 954 988
33,750 shares
Cash Dividends
($.10 per share) (11,483) (11,483)
------- -------- ------ -------- -------- ---------
Balance at December
5, 1998 $38,287 $454,848 $ - $505,413 $(74,123) $924,425
======= ======== ====== ======== ======== ========
See Notes to Quarterly Report on Page 8.
3
Comprehensive Income (Loss)
- ---------------------------
12 Weeks Ended 40 Weeks Ended
Dec. 4, Dec. 5, Dec. 4, Dec. 5,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net Income (Loss) $21,354 $ (8,734) $ 7,186 $21,386
Foreign Currency
Translation
Adjustment 289 (2,114) 2,767 (13,098)
------- -------- ------- -------
Total Comprehensive
Income (Loss) $21,643 $(10,848) $ 9,953 $ 8,288
======= ======== ======= =======
See Notes to Quarterly Report on Page 8.
4
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
--------------------------
(Dollars in thousands)
Dec. 4, 1999 Feb. 27, 1999
-------------- -------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and short-term investments $ 105,984 $ 136,810
Accounts receivable 224,116 204,700
Inventories 861,170 841,030
Prepaid expenses and other assets 73,033 41,497
---------- ----------
Total current assets 1,264,303 1,224,037
---------- ----------
Property:
Property owned 1,750,063 1,597,459
Property leased 89,863 89,028
---------- ----------
Property-net 1,839,926 1,686,487
Other assets 219,825 231,217
---------- ----------
Total Assets $3,324,054 $3,141,741
========== ==========
See Notes to Quarterly Report on Page 8.
5
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
Dec. 4, 1999 Feb. 27, 1999
-------------- -------------
(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Current liabilities:
Current portion of long-term debt $ 2,906 $ 4,956
Current portion of obligations under
capital leases 11,854 11,483
Accounts payable 622,308 557,318
Book overdrafts 145,386 160,288
Accrued salaries, wages and benefits 148,862 152,107
Accrued taxes 52,370 54,819
Other accruals 210,407 193,092
---------- ----------
Total current liabilities 1,194,093 1,134,063
---------- ----------
Long-term debt 836,219 728,390
---------- ----------
Obligations under capital leases 115,079 115,863
---------- ----------
Deferred income taxes 47,895 23,309
---------- ----------
Other non-current liabilities 293,321 302,859
---------- ----------
Commitments and contingencies
Shareholders' equity:
Preferred stock--no par value;
authorized--3,000,000 shares;
issued--none - -
Common stock--$1 par value; authorized--
80,000,000 shares; issued and
outstanding 38,367,216 and
38,290,716 shares, respectively 38,367 38,291
Additional paid-in capital 457,101 454,971
Unamortized value of restricted
stock grant (471) -
Accumulated other comprehensive loss (66,272) (69,039)
Retained earnings 408,722 413,034
---------- ----------
Total shareholders' equity 837,447 837,257
---------- ----------
Total liabilities and shareholders'
equity $3,324,054 $3,141,741
========== ==========
See Notes to Quarterly Report on Page 8.
6
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
40 Weeks Ended
Dec. 4, 1999 Dec. 5, 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,186 $21,386
Adjustments to reconcile net income
to cash provided by operating activities:
Store/Facilities exit charge and asset
write-off 11,953 11,427
Depreciation and amortization 176,608 181,442
Deferred income tax provision (benefit) 4,975 (3,249)
(Gain) loss on disposal of owned property (1,297) 3,939
(Increase)decrease in receivables (17,290) 9,386
Increase in inventories (14,763) (72,706)
Increase in prepaid expenses
and other current assets 410 2,336
(Increase) decrease in other assets (5,200) 4,826
Increase in accounts payable 57,883 108,858
(Decrease) increase in accrued salaries,
wages and benefits (6,520) 1,432
(Decrease) increase in accrued taxes (2,449) 4,125
(Decrease) increase in other accruals
and other liabilities (9,897) 25,263
Other operating activities, net (1,744) (3,188)
--------- ---------
Net cash provided by operating activities 199,855 295,277
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (367,822) (307,875)
Proceeds from disposal of property 75,422 6,297
--------- ---------
Net cash used in investing activities (292,400) (301,578)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt (4,100) (22,500)
Proceeds under revolving lines of credit 125,027 415,000
Payments on revolving lines of credit (215,103) (300,000)
Proceeds from long-term borrowings 200,157 3,642
Payments on long-term borrowings (3,942) (6,507)
Principal payments on capital leases (8,951) (9,274)
Deferred financing fees (6,298) -
Increase (decrease) in book overdrafts (15,944) 7,098
Proceeds from stock options exercised 1,555 988
Cash dividends (11,498) (11,483)
--------- ---------
Net cash provided by financing activities 60,903 76,964
Effect of exchange rate changes on
cash and short-term investments 816 (2,651)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND
SHORT-TERM INVESTMENTS (30,826) 68,012
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD 136,810 70,937
--------- ---------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $105,984 $138,949
========= =========
See Notes to Quarterly Report on Page 8.
7
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1) BASIS OF PRESENTATION
The consolidated financial statements as of and for the 40 week periods
ended December 4, 1999 and December 5, 1998 are unaudited, and in the
opinion of Management, all adjustments necessary for a fair presentation
of these financial statements have been included. The 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 fiscal 1998 Annual Report on Form 10-K.
Certain reclassifications have been made to the prior periods' financial
statements in order to conform to the current period presentation.
2) INCOME TAXES
The income tax provisions recorded for the 40 week periods ended in
fiscal years 1999 and 1998 reflect the Company's estimated expected
annual tax rates applied to their respective domestic and foreign
financial results. For the 40 week period ended December 4, 1999, the
income tax expense of $7.6 million is comprised of a U.S. tax benefit of
approximately $4.1 million offset by a Canadian tax provision of $11.7
million. For the 40 week period ended December 5, 1998, the income tax
provision reflects primarily taxes on U.S. operations as the Canadian
operation income tax expense was principally offset by the reversal of
its deferred tax asset valuation allowance. During the 40 week period of
fiscal 1998, the Company reversed $8.9 million of the Canadian valuation
allowance.
3) FOOD BASICS FRANCHISING
As of December 4, 1999, the Company served 62 Food Basics franchised
stores in Canada. 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 $383
million and $296 million for the 40 week periods ended in fiscal years
1999 and 1998, respectively. In addition, the Company subleases the
stores and leases the equipment in the stores to the franchisees. The
Company also provides merchandising, advertising, accounting and other
consultative services to the franchisees for which it receives a fee,
mainly representing the reimbursement of costs incurred to provide such
services.
8
Included in other assets are Food Basics franchising business
receivables, net of allowance for doubtful accounts, amounting to
approximately $45.7 million and $36.4 million at December 4, 1999 and
February 27, 1999, respectively.
The inventory notes are collateralized by the inventory in the stores,
while the equipment lease receivables are collateralized by the equipment
in the stores. The current portion of the inventory notes and equipment
leases, net of allowance for doubtful accounts, amounting to
approximately $2.3 million and $2.1 million are included in accounts
receivable at December 4, 1999 and February 27, 1999, respectively.
The repayment of the inventory notes and equipment leases are dependent
upon positive operating results of the stores. To the extent that the
franchisees incur operating losses, the Company establishes an allowance
for doubtful accounts. The Company continually assesses the sufficiency
of the allowance on a store by store basis based upon the operating
losses incurred and the related collateral underlying the amounts due
from the franchisees. In the event of default by a franchisee, the
Company reserves the option to reacquire the inventory and equipment at
the store and operate the franchise as a corporate owned store.
4) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"). This
statement requires that all derivative instruments be measured at fair
value and recognized in the balance sheet as either assets or
liabilities. In addition, the accounting for changes in the fair value
of a derivative (gains and losses) depends on the intended use of the
derivative and the resulting designation. For a derivative designated as
a hedge, the change in fair value will be recognized as a component of
other comprehensive income; for a derivative not designated as a hedge,
the change in the fair value will be recognized in the statement of
operations.
In June 1999, the FASB issued SFAS No. 137, "Accounting For Derivative
Instruments And Hedging Activities - Deferral Of The Effective Date of
FASB Statement No. 133" which delays the adoption of SFAS 133 for one
year, to fiscal years beginning after June 15, 2000. The Company plans
to adopt SFAS 133 in the first quarter of fiscal 2001. The Company is
currently evaluating the impact this pronouncement will have on the
Consolidated Financial Statements.
5) STORE AND FACILITIES EXIT COSTS
In May 1998, the Company initiated a vigorous assessment of all aspects
of its business operations in order to identify the factors that were
impacting the performance of the Company.
9
As a result of the above assessment, in the third quarter of fiscal 1998,
the Company decided to exit two warehouse facilities, a coffee plant and
a bakery plant in Canada. In connection with the exit plan, the Company
recorded a charge of approximately $11 million consisting 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 warehouses and the coffee plant. The volume
associated with the two warehouses has been transferred to other
warehouses in close geographic proximity. Further, the manufacturing
processes of the coffee plant have been transferred to the Company's
remaining coffee processing facility. The processing associated with the
Canadian bakery has been outsourced effective January 1999.
In addition, on December 8, 1998, the Company's Board of Directors
approved a plan which included the exit of 127 underperforming stores
throughout the United States and Canada and the disposal of two other
properties. Included in the 127 stores are 31 stores representing the
entire Richmond, Virginia market. Further on January 28, 1999, the Board
of Directors approved the closure of five additional underperforming
stores. In connection with the Company's plan to exit these 132 stores
and the write-down of two properties, the Company recorded a charge in
the fourth quarter of fiscal 1998 of approximately $215 million. This
$215 million charge consisted of $8 million of severance, $1 million of
facilities occupancy costs, $114 million of store occupancy costs, which
principally relates to the present value of future lease obligations, net
of anticipated sublease recoveries, which extend through fiscal 2028, an
$83 million write-down of store fixed assets and a $9 million write-down
to their estimated fair value of the two properties which are held for
sale. To the extent fixed assets included in stores identified for
closure could be utilized in other continuing stores, the Company has or
will transfer those assets to continuing stores. To the extent those
fixed assets cannot be transferred, the Company will scrap them 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 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 are 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 will be expensed as incurred as the plan is executed. In the 40
week period of fiscal 1999, the Company recorded an additional pretax
charge of $11 million for severance relating to the 132 stores.
10
The severance charges of all the above items totaled approximately $26
million, resulting from the termination of 2,352 employees. The Company
paid $15 million of these severance costs as of December 4, 1999 and
expects the remainder will be paid by 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, net of a $12
million gain related to the disposition of fixed and intangible assets.
The net charge is included in "Store operating, general and
administrative expense". The Company paid $4 million of the total
severance charge related to the Atlanta exit as of December 4, 1999 which
resulted from the termination of 1,002 employees. The remaining $2
million of severance will be paid by the first quarter of fiscal year
2000.
The following tabular reconciliation summarizes the activity related to
the aforementioned charges since the beginning of the fiscal year.
Reserve Reserve
Balance Balance
at at
February Addi- Utiliz- Adjust- December
(in thousands) 28, 1999 tion (1) ation ment (2) 4, 1999
- -------------- -------- ------- -------- -------- --------
Store Occupancy $114,532 $14,355 $ (2,400)(3) $(22,195) $104,292
Fixed Assets - - (295) 295 -
Severance and Benefits 10,066 16,310 (18,960) - 7,416
Facilities Occupancy 4,038 3,188 (2,733) - 4,493
-------- ------- -------- -------- --------
Total $128,636 $33,853 $(24,388) $(21,900) $116,201
======== ======= ======== ======== ========
(1) The addition represents an increase to the store occupancy reserve for
the present value interest accrued, the additional severance cost and
the cost (including store occupancy, severance and facilities costs) of
exiting the Atlanta market.
(2) 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. The Company has made
favorable progress to date in marketing and subleasing the closed
stores. As a result, in the 12 and 40 week periods ended December 4,
11
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 additional
fixed asset write-downs resulting from lower than anticipated proceeds
from the sale of fixed assets.
Based upon current available information, Management evaluated the
reserve balance as of December 4, 1999 and has concluded that it is
adequate.
(3) Store occupancy utilization is comprised of $21.7 million of lease and
other occupancy payments for the period, net of $19.3 million of net
proceeds on the assignment of leases which was considered in the
original charge recorded during fiscal 1998.
As of December 4, 1999, the Company closed all 34 stores in the Atlanta,
Georgia market and 126 of the 132 other stores, including all 31 stores in
the Richmond, Virginia market. The remaining 6 stores will be closed by the
end of fiscal 1999.
At December 4, 1999, $45.4 million of the reserve is included in "Other
accruals" and $70.8 million is included in "Other non-current liabilities" in
the accompanying Consolidated Balance Sheet.
Included in the accompanying Statement 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
for the 12 and 40 week periods ended December 4, 1999 and December 5, 1998
are as follows:
(in thousands) 12 Weeks Ended 40 Weeks Ended
- -------------- ------------------- -------------------
Dec. 4, Dec. 5, Dec. 4, Dec. 5,
1999 1998 1999 1998
-------- -------- -------- --------
Sales $13,451 $251,818 $198,473 $853,867
======== ======== ======== ========
Operating Loss $(3,559) $ (8,029) $(29,690) $(26,100)
======= ======== ======== ========
12
6) OPERATING SEGMENTS
During the fourth quarter of fiscal 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). This statement establishes standards for reporting information about
operating segments in annual financial statements and selected information
in interim financial statements. It also establishes standards for related
disclosures about products and services and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. The Company's chief operating decision maker is the
Chief Executive Officer.
The Company currently operates in three reportable segments: United States
Retail, Canada Retail and Wholesale. The retail segments are comprised of
retail supermarkets in the United States and Canada, while the wholesale
segment is comprised of the Company's Canadian store franchising operation
which includes serving as the exclusive wholesaler to such franchised
stores.
The accounting policies for the segments are the same as those described in
the Summary of Significant Accounting Policies in the Company's Fiscal 1998
Annual Report. The Company measures segment performance based upon
operating profit.
Interim information on segments is as follows:
(in thousands)
40 Week Period
Fiscal 1999
- ------------------ U.S. Canada Total
--------------------
Retail Retail Wholesale Company
---------- ---------- --------- ----------
Sales $6,105,177 $1,242,099 $382,954 $7,730,230
Depreciation and amortization 155,528 21,080 - 176,608
Operating income 41,843 18,164 12,735 72,742
Interest expense (52,199) (10,413) - (62,612)
Interest income 293 1,957 2,358 4,608
(Loss) income before taxes (10,063) 9,708 15,093 14,738
Total assets 2,703,497 551,700 68,857 3,324,054
Capital expenditures 315,340 52,482 - 367,822
13
40 Week Period
Fiscal 1998
- ------------------- U.S. Canada Total
--------------------
Retail Retail Wholesale Company
---------- --------- --------- ----------
Sales $6,306,935 $1,150,289 $295,811 $7,753,035
Depreciation and amortization 163,265 18,177 - 181,442
Operating income 45,853 16,943 8,339 71,135
Interest expense (43,112) (9,913) - (53,025)
Interest income 602 2,081 2,503 5,186
Income before taxes 3,343 9,111 10,842 23,296
Total assets 2,718,664 430,248 54,794 3,203,706
Capital expenditures 259,736 48,139 - 307,875
7) LITIGATION
Reference should be made to Item 1, "Legal Proceedings" in Part II of this
Quarterly Report for an update on litigation matters.
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
12 WEEKS ENDED DECEMBER 4, 1999
---------------------------------
OPERATING RESULTS
Sales for the third quarter ended December 4, 1999 of $2.33 billion
decreased approximately $12 million or 0.5% from the prior year third
quarter amount. The decrease is attributable to the closure of 212 stores,
excluding replacement stores, since the beginning of the third quarter of
fiscal 1998, which reduced total sales by approximately $283 million, as
well as a decrease in sales of $4 million in the Company's Compass Foods
Division. The decrease is partially offset by 55 new stores, excluding
replacement stores, since the beginning of the third quarter of fiscal 1998
which added approximately $158 million to sales in the third quarter of
fiscal 1999. In addition, wholesale sales to the Food Basics franchised
stores increased $29 million, exclusive of the Canadian exchange rate
effect. An increase in the Canadian exchange rate improved third quarter
fiscal 1999 sales by $21 million. In addition, same store sales ("same
store sales" referred to herein include replacement stores) increased $67
million from the same period last year.
Average weekly sales per supermarket were approximately $247,100 versus
$209,900 for the corresponding period of the prior year resulting in a 17.7%
increase. Same store sales for Canadian operations increased 5.4% from the
prior year and same store sales for U.S. operations increased 3.6% from the
prior year.
Gross margin as a percent of sales increased to 29.00% for the third quarter
of fiscal 1999 from 28.99% for the third quarter of fiscal 1998. The gross
margin dollar decrease of approximately $3 million resulted from a decrease
in sales volume, which impacted gross margin by $14 million, exclusive of
the effect of the change in the Canadian exchange rate. The decrease is
partially offset by an increase of $6 million from an increase in the gross
margin rate as well as an increase of $5 million from the effect of the
change in the Canadian exchange rate. The U.S. operations gross margin
decreased $19 million, comprised of a decrease of $28 million due to a
decrease in sales volume, partially offset by an increase of $9 million due
to an increase in the gross margin rate. The Canadian operations gross
margin increased $16 million, comprised of an increase of $14 million due to
an increase in sales volume and an increase of $5 million due to the effect
of the change in the Canadian exchange rate, partially offset by a decrease
of $3 million from a decrease in the gross margin rate.
15
Store operating, general and administrative expense decreased $61 million
compared to the corresponding period of the prior year. The decrease is due
principally to the reduction in occupancy and labor expenses as a result of
store closings as well as a net decrease in charges relating to the exit
programs. In the third quarter of 1999, the Company recorded a net credit of
$5.2 million representing a $21.9 million reversal of Project Great Renewal
charges originally recorded in 1998, partially offset by $16.7 million of
costs related to the exit plans. The net credit of $5.2 million compares to
a special charge of $30.6 million for strategic initiatives recorded in the
corresponding period of 1998.
As of December 4, 1999, the Company closed 126 of the 132 stores identified
as part of Project Great Renewal and 34 stores relating to the Atlanta store
exit program. The remaining 6 stores will be closed by the end of fiscal
1999. Further, during the fourth quarter of fiscal 1999, the Company
expects to incur pretax losses relating to Project Great Renewal ranging
between $20 and $25 million which are not currently accruable. These
amounts include operating losses of the remaining 6 stores prior to closure,
employee termination costs which have not been communicated to the affected
employees as of December 4, 1999, and costs related to the conversion of
stores to the Food Basics format.
Interest expense increased $4 million from the corresponding period of the
previous year, primarily due to the additional present value interest
related to the future lease obligations of the store exit programs as well
as the issuance of $200 million 9.375% senior quarterly interest bonds on
August 6, 1999.
Income before income taxes for the third quarter ended December 4, 1999 was
$37 million compared to a loss of $16.4 million for the comparable period in
the prior year for an increase of $53.4 million. The higher income is
attributable principally to a reduction in occupancy and labor expenses as a
result of store closings and a net credit in fiscal 1999, as discussed
above, compared to a charge in fiscal 1998 related to initiatives under the
Company's Project Great Renewal, partially offset by an increase in interest
expense.
The income tax expense recorded in the third quarter of fiscal 1999 reflects
the Company's estimated expected annual tax rates applied to its respective
domestic and foreign operations. The effective tax rate for the third
quarter of fiscal 1999 was 42.4%. The third quarter fiscal 1998 income tax
provision mainly reflects taxes on U.S. income, as the Canadian income tax
expense was principally offset by the reversal of its deferred tax asset
valuation allowance. During the third quarter of fiscal 1998, the Canadian
operations generated pretax earnings and reversed a portion of the valuation
allowance in the amount of $1.2 million. Although Canada generated pretax
16
earnings in the third quarter of fiscal 1998, at December 5, 1998, the
Company was unable to conclude that the Canadian deferred tax assets were
more likely than not to be realized. This conclusion was based in part on
Management's assessment of the competitive Canadian marketplace and the
level of the Canadian pretax earnings, which for financial statement
purposes is higher than the taxable income for tax purposes due to
differences between the financial statement and income tax treatment of
certain items. During the fourth quarter of fiscal 1998, the Company
determined that due to the actions taken as part of its strategic
initiatives under Project Great Renewal, it was more likely than not that
the deferred tax asset would be realized. Accordingly, the Company reversed
the remaining portion of the valuation allowance amounting to approximately
$60 million during the fourth quarter of fiscal 1998.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
40 WEEKS ENDED DECEMBER 4, 1999
---------------------------------
OPERATING RESULTS
Sales for the 40 weeks ended December 4, 1999 of $7.73 billion decreased
approximately $23 million or 0.3% from the prior year. The decrease is
attributable to the closure of 242 stores, excluding replacement stores,
since the beginning of the first quarter of fiscal 1998, which reduced total
sales by approximately $837 million, as well as a decrease in sales of $13
million in the Company's Compass Foods Division. The decrease is partially
offset by 62 new stores, excluding replacement stores, since the beginning
of the first quarter of fiscal 1998, which added approximately $457 million
to sales in the 40 week period of fiscal 1999. In addition, wholesale sales
to the Food Basics franchised stores increased $85 million, exclusive of the
effect of the Canadian exchange rate. An increase in the Canadian exchange
rate improved sales by $5 million in the 40 week period of fiscal 1999. In
addition, same store sales increased $280 million from the same period last
year.
Average weekly sales per supermarket were approximately $241,100 versus
$206,800 for the corresponding period of the prior year resulting in a 16.6%
increase. Same store sales for Canadian operations increased 6.7% from the
prior year while same store sales for U.S. operations increased 4.1% from
the prior year.
Gross margin as a percent of sales decreased 30 basis points to 28.58% from
28.88% for the prior year. Margins were negatively impacted by accelerated
inventory markdowns in stores that were identified for closure under Project
Great Renewal and the exit of the Atlanta market during the first quarter of
fiscal 1999. The gross margin dollar decrease of $30 million resulted from
a decrease in sales volume, which impacted gross margin by $20 million, and
a decrease of $11 million from the decrease in the gross margin rate. The
decrease was partially offset by an increase of $1 million from the effect
of the change in the Canadian exchange rate. The U.S. operations gross
margin decrease of $63 million resulted from a decrease in sales volume,
which impacted gross margin by $61 million, and a decrease of $2 million
from a decrease in the gross margin rate. The Canadian operations gross
margin increase of $33 million resulted from an increase in sales volume,
which impacted gross margin by $41 million, and an increase of $1 million
from the effect of the change in the Canadian exchange rate. The
decrease was partially offset by a decrease of $9 million from a decrease
in the gross margin rate.
Store operating, general and administrative expense decreased $32 million or
33 basis points to 27.64% from 27.97% in the corresponding period of the
prior year. The decrease is due principally to a reduction in occupancy and
labor expenses as a result of store closings, partially offset by an increase
in net charges for strategic initiatives of $66 million. In the fiscal 1999
40 week period, the Company included net charges of $100.7 million in store
18
operating, general and administrative expense representing $122.6 million of
costs related to the Project Great Renewal and Atlanta exit plans, partially
offset by a $21.9 million reversal of Project Great Renewal charges
originally recorded in 1998. The significant costs in the Project Great
Renewal plan are severance of $11 million which could not be accrued in
fiscal 1998 because it did not meet the criteria under EITF 94-3,
professional fees of $14 million associated with the implementation of the
store exit program, transitionally higher labor costs of $10 million and
costs of $10 million for the conversion of additional stores to the Food
Basics format. The costs of exiting the Atlanta market consists of severance
of $6 million and store occupancy cost of $11 million which relates
principally to the present value of future lease obligations, net of a $12
million gain that resulted from the disposition of fixed and intangible
assets. The net special charge of $100.7 million compares to a special
charge of $34.7 million for strategic initiatives recorded in the
corresponding period of 1998.
Interest expense for the 40 weeks ended December 4, 1999 increased
approximately $10 million from the corresponding period of the prior year,
primarily due to the present value interest related to the future lease
obligations of the store exit programs as well as the issuance of $200
million 9.375% senior quarterly interest bonds on August 6, 1999.
Income before income taxes for the 40 week period ended December 4, 1999 was
approximately $15 million compared to approximately $23 million for the
comparable period in the prior year for a decrease of approximately $8
million. The lower income is attributable to initiatives under the
Company's Project Great Renewal, exiting the Atlanta market in the first
quarter of fiscal 1999, an increase in interest expense, partially offset by
the effects of a reduction in occupancy and labor expenses relating to store
closings.
The income tax expense recorded for the 40 week period of fiscal 1999
reflects the Company's estimated expected annual tax rates applied to its
respective domestic and foreign operations. The effective tax rate for the
40 week period of fiscal 1999 was 51.2%. The 40 week period of fiscal 1998
income tax provision mainly reflects taxes on U.S. income, as the Canadian
income tax expense was principally offset by the reversal of its deferred
tax asset valuation allowance. During the 40 week period of fiscal 1998,
the Canadian operations generated pretax earnings and reversed a portion of
the valuation allowance in the amount of $8.9 million. Although Canada
generated pretax earnings during the 40 week period of fiscal 1998, at
December 5, 1998, the Company was unable to conclude that the Canadian
deferred tax assets were more likely than not to be realized. This
conclusion was based in part on Management's assessment of the competitive
Canadian marketplace and the level of the Canadian pretax earnings, which
for financial statement purposes is higher than the taxable income for tax
purposes due to differences between the financial statement and income tax
treatment of certain items.
19
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the third quarter with working capital of $70 million
compared to $90 million at the beginning of the fiscal year. The Company
had cash and short-term investments aggregating $106 million at the end of
the third quarter of fiscal 1999 compared to $137 million as of fiscal 1998
year end. Short-term investments were approximately $9 million and $25
million at December 4, 1999 and February 27, 1999, respectively. The
decrease in working capital is also attributable to the increase in accounts
payable, primarily driven by increased purchases due to seasonality. The
working capital decrease is partially offset by an increase in prepaid
expenses and other assets due to a change in classification in deferred
taxes from long-term to short-term.
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.
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 a
U.S. portion amounting to $465 million and a Canadian portion amounting to
C$50 million (U.S. $34 million at December 4, 1999). As of December 4,
1999, the Company had approximately $44 million outstanding borrowings under
the Credit Agreement. Accordingly, as of December 4, 1999, the Company had
$455 million available under the Credit Agreement. Borrowings under the
agreement during the 40 week period were subject to interest at the weighted
average rate of 5.5%.
In addition to the Credit Agreement, the Company has various uncommitted
lines of credit with several banks totaling $179 million. As of December 4,
1999, the Company had $19 million outstanding and $160 million available in
uncommitted lines of credit.
The Company's Credit Agreement and certain of its notes contain various
financial covenants which require, among other things, minimum net worth and
maximum levels of indebtedness and lease commitments. The Company was in
compliance with all such covenants as of December 4, 1999.
The Company's existing senior debt rating was BBB- with Standard & Poor's
Ratings Group and Ba1 with Moody's Investors Service as of December 4, 1999.
Rating changes could affect the availability and cost of financing to the
Company.
For the 40 weeks ended December 4, 1999, capital expenditures totaled
approximately $368 million, which included 46 new stores and 54 remodels and
enlargements. Currently, the Company expects fiscal 1999 planned capital
expenditures of approximately $485 million.
20
These available cash resources, together with cash generated from
operations, are sufficient for the Company's capital expenditure program,
mandatory scheduled debt repayments and dividend payments for the remainder
of fiscal 1999.
MARKET RISK
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company is exposed to market risk in the areas of interest rates and foreign
currency exchange rates.
Interest rates
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's debt obligations. The Company has no cash flow
exposure due to rate changes on its $775 million in notes as of December 4,
1999 and $575 million as of February 27, 1999. However, the Company does
have cash flow exposure on its committed and uncommitted bank lines of credit
as interest is based on LIBOR. As of December 4, 1999, there were no
outstanding borrowings subject to interest rate fluctuations.
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
changes in the Canadian currency of 10% will result in a material effect on
future earnings, financial position or cash flows of the Company.
The Company entered into a five year cross-currency swap agreement to hedge
five year notes in Canada that are denominated in U.S. dollars. The Company
does not have any currency risk regarding the Canadian five year notes. The
Company is exposed to currency risk in the event of default by the
counterparty. Such default is remote, as the counterparty is a widely
recognized and reputable investment banker. The fair value of the cross-
currency swap agreement was favorable to the Company by $5.7 million and $6.9
million as of December 4, 1999 and February 27, 1999, respectively. A 10%
change in the Canadian exchange rates would have resulted in the fair value
fluctuating approximately $6.8 million at December 4, 1999 and $6.5 million
at December 5, 1998.
21
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 to be Year 2000 compliant. Although the change in date has
occurred, it is not possible to conclude that all aspects of the Year 2000
issue that may affect the Company, including those relating to vendors, have
been resolved. However, to date, the Company has not experienced any
significant disruptions in its operations relating to Year 2000 issues.
The costs to address the Company's Year 2000 issues were approximately $10
million. Substantially all of these costs have been incurred as of December
4, 1999.
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
failure 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 failure.
CAUTIONARY NOTE
This report contains certain forward-looking statements about the future
performance of the Company which are based on Management's assumptions and
beliefs in light of the information currently available to it. The Company
assumes no obligation to update the information contained herein. These
forward-looking statements are subject to uncertainties and other factors
that could cause actual results to differ materially from such statements
including, but not limited to: competitive practices and pricing in the food
industry, generally and particularly in the Company's principal markets; the
Company's relationships with its employees and the terms of future collective
bargaining agreements; the costs and other effects of legal and
administrative cases and proceedings; the nature and extent of continued
consolidation in the food industry; changes in the financial markets which
may affect the Company's cost of capital and the ability of the Company to
access the public debt and equity markets to refinance indebtedness and fund
the Company's capital expenditure program on satisfactory terms; supply or
quality control problems with the Company's vendors; changes in economic
conditions which affect the buying patterns of the Company's customers; and
the ability of the Company and its vendors, financial institutions and others
to resolve potential Year 2000 processing issues in a timely manner.
22
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
On January 13, 2000, the Attorney General of the State of New York
filed an action in New York Supreme Court, County of New York
against the Company, its subsidiary Shopwell, Inc., et. al., The
People of the State of New York v. Chelsea Trucking Inc., et. al.,
Index No. 00400176. The complaint alleges that defendants violated
certain New York statutes and regulations by failing to pay minimum
and overtime wages to individuals who deliver groceries at a Food
Emporium store in New York City and by making improper deductions
from wages paid to those individuals. The complaint seeks a
determination that defendants have willfully violated the
applicable state law, an unspecified amount of restitution of all
underpayments resulting from such violations, an injunction and
costs.
On January 13, 2000, a purported class action lawsuit was filed
against the Company, its subsidiary Shopwell, Inc., and others in
the United States District Court for the Southern District of New
York, Faty Ansoumana, et. al. v. Gristedes Operating Corp., et.
al., 00 Civ. 0253. Plaintiffs bring the action on behalf of an
alleged class consisting of all persons who worked for defendants
as delivery persons and/or dispatchers at any time after January
13, 1994. Plaintiffs allege that defendants violated the Federal
Labor Standards Act and the New York Labor Law by failing to pay
minimum and overtime wages, and by retaliating against individuals
who complained about such violations. The complaint seeks a
declaration that defendants have violated applicable federal and
state laws, an award of an unspecified amount of unpaid wages,
liquidated damages under 29 U.S.C. Section 216, interest and costs,
including attorneys' fees.
The Company plans to vigorously defend both claims, on the ground,
among others, that the individuals in question were not employees
of the Company.
23
The action entitled Shirley A. Lang, et. al. v. Kohl's Food Stores,
Inc. and The Great Atlantic & Pacific Tea Company, Inc., was tried
to a Madison, Wisconsin jury during the week commencing August 9,
1999. The issue before the jury was the alleged violation of the
Federal Equal Pay Act stemming from the complaint that Kohl's
produce clerk and produce manager positions allegedly pay more than
Kohl's bakery and deli clerk and manager positions, but allegedly
require no greater skill than the produce positions. The
plaintiffs sought lost wages, punitive damages and other benefits,
costs and attorney's fees and other relief. In July the court had
granted summary judgment to the defendants in respect of the
alleged violations of the Civil Rights Act of 1964 ("Title VII"),
arising out of the same produce/bakery deli pay differential
allegations.
On August 13, 1999, the jury returned a unanimous verdict in favor
of the defendants (i.e., the Company and its Kohl's Food Stores,
Inc. subsidiary). An appeal has been filed, but the Company
expects to prevail on the appeal.
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 19, 1999, Form 10-Q report filed with the Commission.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None.
24
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: January 18, 2000 By: /s/ Kenneth A. Uhl
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
25
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