UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended December 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
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)
(201) 573-9700
Registrant's telephone number, including area code
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 [X] NO [ ]
As of January 12, 2001 the Registrant had a total of 38,347,216 shares of common
stock - $1 par value outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
12 Weeks Ended 40 Weeks Ended
------------------------ ------------------------
December 2, December 4, December 2, December 4,
2000 1999 2000 1999
----------- ----------- ---------- --------------
Sales $2,428,790 $2,332,128 $8,068,144 $7,730,230
Cost of merchandise sold (1,740,230) (1,655,840) (5,755,986) (5,521,052)
---------- ---------- ---------- ----------
Gross margin 688,560 676,288 2,312,158 2,209,178
Store operating, general and
administrative expense (690,744) (620,204) (2,264,120) (2,136,436)
---------- ---------- ---------- ----------
(Loss) income from operations (2,184) 56,084 48,038 72,742
Interest expense (23,240) (20,308) (74,308) (62,612)
Interest income 1,472 1,269 4,762 4,608
----------- --------- ---------- ----------
(Loss) income before
income taxes (23,952) 37,045 (21,508) 14,738
Benefit (provision)
for income taxes 9,439 (15,691) 7,205 (7,552)
---------- ------- -------- --------
Net (loss) income $(14,513) $21,354 $(14,303) $ 7,186
========== ======= ======== ========
(Loss) earnings per share:
Net (loss) income per share -
basic and diluted $ (0.38) $ 0.56 $(0.37) $ 0.19
======= ======= ====== ========
Weighted average number of
common shares outstanding 38,347,216 38,367,216 38,347,216 38,345,329
Common stock equivalents - 46,118 - 99,763
---------- ---------- ---------- ----------
Weighted average number of
common and common
equivalent shares
outstanding 38,347,216 38,413,334 38,347,216 38,445,092
========== ========== ========== ==========
See Notes to Quarterly Report
-2-
<PAGE>
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Shareholders' Equity and Comprehensive (Loss) Income
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Una- Accumu-
mortized lated
Value of Other
Addit- Restrict- Compre- Total
ional ed hensive Share-
Common Paid-In Stock Retained (Loss)/ holders'
Stock Capital Grant Earnings Income Equity
------- ------- -------- -------- ------- ----------
FY 2000 -
40 Week Period
Balance at beginning
of period
38,367,216 shares $38,367 $457,101 $ (441) $411,861 $(60,696) $846,192
Net loss (14,303) (14,303)
Other comprehensive
income:
Foreign currency
translation
adjustment (12,179) (12,179)
Minimum pension
liability
adjustment 2,682 2,682
Forfeiture of
restricted
stock grant (20) (631) 441 (210)
Cash dividends
($.10 per share) (11,505) (11,505)
------- -------- ------ -------- ------- --------
Balance at end of
period $38,347 $456,470 $ - $386,053 $(70,193) $810,677
======= ======== ====== ======== ======== ========
FY 1999 -
40 Week Period
Balance at beginning
of period
38,290,716 shares $38,291 $454,971 $ - $413,034 $(69,039) $837,257
Net income 7,186 7,186
Other comprehensive
income:
Foreign currency
translation
adjustment 2,767 2,767
Issuance of 20,000
shares of
common stock 20 631 (651) -
Exercise of stock
options,
56,500 shares 56 1,499 1,555
Amortization of
restricted
stock grant 180 180
Cash dividends
($.10 per share) (11,498) (11,498)
------- -------- ----- -------- -------- --------
Balance at end
of period $38,367 $457,101 $(471) $408,722 $(66,272) $837,447
======= ======== ===== ======== ======== ========
Comprehensive (Loss) Income
12 Weeks Ended 40 Weeks Ended
------------------------ -----------------------
December 2, December 4, December 2, December 4,
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net (loss) income $(14,513) $ 21,354 $(14,303) $ 7,186
Foreign currency
translation adjustment (9,679) 289 (12,179) 2,767
Minimum pension
liability adjustment - - 2,682 -
-------- --------- -------- ---------
Total comprehensive
(loss) income $(24,192) $ 21,643 $(23,800) $9,953
======== ========= ======== ======
See Notes to Quarterly Report
-3-
<PAGE>
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
December 2, February 26,
2000 2000
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and short-term investments $103,940 $124,603
Accounts receivable 199,124 227,078
Inventories 869,792 791,150
Prepaid expenses and other assets 85,715 80,052
--------- ---------
Total current assets 1,258,571 1,222,883
--------- ---------
Property:
Property owned 1,893,594 1,789,662
Property leased 88,176 94,146
--------- ---------
Property-net 1,981,770 1,883,808
Other assets 211,308 228,834
---------- ----------
Total assets $3,451,649 $3,335,525
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 15,437 $ 2,382
Current portion of obligations
under capital leases 11,525 11,327
Accounts payable 617,951 583,142
Book overdrafts 110,419 112,465
Accrued salaries, wages and benefits 155,380 155,649
Accrued taxes 62,111 51,611
Other accruals 194,979 208,002
--------- ---------
Total current liabilities 1,167,802 1,124,578
--------- ---------
Long-term debt 1,040,035 865,675
Obligations under capital leases 109,045 117,870
Other non-current liabilities 324,090 381,210
--------- ---------
Total liabilities 2,640,972 2,489,333
--------- ---------
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 (70,193) (60,696)
Retained earnings 386,053 411,861
---------- ----------
Total shareholders' equity 810,677 846,192
---------- ----------
Total liabilities and shareholders' equity $3,451,649 $3,335,525
========== ==========
See Notes to Quarterly Report
-4-
<PAGE>
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Cash Flows
(Dollars in thousands)
(Unaudited)
40 Weeks Ended
----------------------------------
December 2, 2000 December 4, 1999
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(14,303) $7,186
Adjustments to reconcile net (loss)
income to cash provided
by operating activities:
Store/Facilities exit charge (reversal)
and asset write-off (3,061) 11,953
Environmental charge 4,029 -
Depreciation and amortization 195,047 176,608
Deferred financing expense 919 838
Deferred income tax (benefit) provision (9,992) 4,975
Gain on disposal of owned property (1,634) (1,297)
Other changes in assets and liabilities:
Decrease (increase) in receivables 22,995 (17,290)
(Increase) in inventories (87,561) (14,763)
(Increase) decrease in prepaid expenses
and other current assets (3,727) 410
(Increase) in other assets (4,153) (6,038)
Increase in accounts payable 44,521 57,883
Increase (decrease) in accrued salaries,
wages and benefits 3,772 (6,520)
Increase (decrease) in accrued taxes 8,505 (2,449)
(Decrease) in other accruals and other
liabilities (44,218) (9,897)
Other operating activities, net 4,481 (1,744)
------- -------
Net cash provided by operating activities 115,620 199,855
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (325,729) (367,822)
Proceeds from disposal of property 25,240 75,422
-------- --------
Net cash used in investing activities (300,489) (292,400)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt (17,000) (4,100)
Proceeds under revolving lines of credit 511,471 125,027
Payments on revolving lines of credit (326,556) (215,103)
Proceeds from long-term borrowings 22,620 200,157
Payments on long-term borrowings (3,125) (3,942)
Principal payments on capital leases (8,514) (8,951)
Payment of deferred financing fees (373) (6,298)
Decrease in book overdrafts (739) (15,944)
Proceeds from stock options exercised - 1,555
Cash dividends (11,505) (11,498)
------- -------
Net cash provided by financing activities 166,279 60,903
Effect of exchange rate changes on cash
and short-term investments (2,073) 816
------- -------
Net decrease in cash and short-term investments (20,663) (30,826)
Cash and short-term investments at beginning
of period 124,603 136,810
------- -------
Cash and short-term investments at end of period $103,940 $105,984
======== ========
See Notes to Quarterly Report
-5-
<PAGE>
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements for the 12 and 40 week periods ended
December 2, 2000 and December 4, 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 12 and 40 week periods 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 December 2, 2000, the Company served 68 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 $152 million and $128 million for the third quarters of
fiscal 2000 and 1999, respectively, and $486 million and $387 million for the 40
week periods ended in fiscal years 2000 and 1999, respectively. In addition, the
Company subleases the stores and leases the equipment in the stores to the
franchisees. The Company also provides merchandising, advertising, accounting
and other consultative services to the franchisees for which it receives a fee
which primarily represents the reimbursement of costs incurred to provide such
services.
The Company holds as assets inventory notes collateralized by the inventory in
the stores and equipment lease receivables collateralized by the equipment in
the stores. The current portion of the inventory notes and equipment leases, net
of allowance for doubtful accounts, amounting to approximately $4.4 million and
$4.1 million, are included in accounts receivable at December 2, 2000 and
February 26, 2000, respectively. The long-term portion of the inventory notes
and equipment leases, net of allowance for doubtful accounts, amounting to
approximately $51.9 million and $53.4 million are included in other assets at
December 2, 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 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 is required to adopt SFAS 133 and SFAS 138 in the first quarter of
fiscal 2001. The Company does not expect these pronouncements will have a
material impact on the Company's financial position, results of operations or
cash flow.
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 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 ("EITF") issued No. 00-14
"Accounting for Certain Sales Incentives". The EITF 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 issued by the Company 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 was transferred to other warehouses in close geographic
proximity. Further, the manufacturing processes of the coffee plant were
transferred to the Company's remaining coffee processing facility. The
processing associated with the Canadian bakery was outsourced in 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 were 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 two properties. 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 fiscal 1998, there were other charges
related to the plan which could not be accrued for at February 27, 1999 because
they did not meet the criteria for accrual under EITF 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
Activity (Including Certain Costs Incurred in a Restructuring)." Such costs have
been expensed as incurred as the plan was being executed. During the 40 week
period ended December 4, 1999, the Company recorded an additional pretax charge
of $11 million for severance related to the 132 stores. No additional charges
were recorded during the 40 week period of fiscal 2000.
On April 26, 1999, the Company announced that it had reached definitive
agreements to sell 14 stores in the Atlanta, Georgia market, two of which were
previously included in the Company's store exit program. In conjunction with the
sale, the Company decided to exit the entire Atlanta market and close the
remaining 22 stores, as well as the distribution center and administrative
office. Accordingly, at the time of the announcement, the Company recorded a
fiscal 1999 first quarter net pretax charge of approximately $5 million. This
charge was comprised of severance of $6 million and 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 $28 million of the total net severance charges from the time of
the original charges through the third quarter of fiscal 2000 which resulted
from the termination of approximately 3,400 employees. The remaining severance
payments to individuals will be made by the end of fiscal 2000.
The following reconciliation summarizes the activity related to the
aforementioned charges since the beginning of fiscal 1999:
Severance
Store Fixed and Facilities
Occupancy Assets Benefits Occupancy Total
--------- ------ -------- ---------- -----
(Dollars in thousands)
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) 3,997 - - - 3,997
Utilization (5) (21,277) - (4,580) (463) (26,320)
Adjustment (3) - - - (3,061) (3,061)
-------- ----- ------ ------- -------
Reserve Balance at
Dec. 2, 2000 $86,173 $ - $ 2,920 $ 43 $89,136
======= ===== ======= ====== =======
(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
determining 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
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 $4.0 million to store occupancy during the first three
quarters of fiscal 2000 represents the present value of accrued interest
related to lease obligations.
(5)Store occupancy utilization of $21.3 million and facilities occupancy of
$0.5 million represent lease and other occupancy payments made during the
40 week period ended December 2, 2000.
Based upon current available information, Management evaluated the reserve
balance of $89.1 million as of December 2, 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.
At December 2, 2000, approximately $28 million of the reserve is included in
"Other accruals" and the remaining amount is included in "Other non-current
liabilities" in the Consolidated Balance Sheets.
Included in the Statements of Consolidated Operations are the operating results
of the 132 underperforming stores (including 31 stores in the Richmond, Virginia
market) and the 34 Atlanta stores which the Company has exited. The operating
results of these stores are as follows:
(In thousands) 12 Weeks Ended 40 Weeks Ended
-------------------------- ------------------------
December 2, December 4, December 2, December 4,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Sales $ 138 $13,451 $ 515 $198,473
====== ======= ====== ========
Operating Loss $ (44) $(3,559) $ (115) $(29,690)
====== ======= ====== ========
As of the end of fiscal 1999, the Company had closed 165 stores, including 34
stores in the Atlanta, Georgia market and 31 stores in the Richmond, Virginia
market.
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:
(Dollars in thousands)
12 Weeks Ended 40 Weeks Ended
------------------------- ------------------------
December 2, December 4, December 2, December 4,
2000 1999 2000 1999
------------------------- ------------------------
Sales
U.S. Retail $1,883,595 $1,812,210 $6,268,609 $6,105,177
Canada Retail 393,467 392,216 1,313,545 1,238,089
Canada Wholesale 151,728 127,702 485,990 386,964
---------- ---------- ---------- ----------
Total Company $2,428,790 $2,332,128 $8,068,144 $7,730,230
========== ========== ========== ==========
Depreciation and amortization
U.S. Retail $ 52,285 $47,505 $170,672 $155,528
Canada Retail 7,311 6,801 24,375 21,080
Canada Wholesale - - - -
---------- ------- -------- --------
Total Company $ 59,596 $54,306 $195,047 $176,608
========== ======= ======== ========
(Loss) income from operations
U.S. Retail $ (9,281) $45,328 $ 14,191 $ 41,843
Canada Retail 1,554 5,479 17,681 18,093
Canada Wholesale 5,543 5,277 16,166 12,806
---------- ------- -------- --------
Total Company $ (2,184) $56,084 $ 48,038 $ 72,742
========== ======= ======== ========
(Loss) income before income taxes
U.S. Retail $ (29,282) $28,232 $(48,929) $(10,063)
Canada Retail (518) 3,414 10,320 11,265
Canada Wholesale 5,848 5,399 17,101 13,536
---------- ------- -------- --------
Total Company $ (23,952) $37,045 $(21,508) $ 14,738
========== ======= ======== ========
Capital expenditures
U.S. Retail $ 74,334 $87,279 $277,223 $315,340
Canada Retail 9,752 23,777 48,506 52,482
Canada Wholesale - - - -
---------- -------- -------- --------
Total Company $ 84,086 $111,056 $325,729 $367,822
========== ======== ======== ========
December 2, February 26,
2000 2000
------------ ------------
Total assets
U.S. Retail $2,827,136 $2,684,624
Canada Retail 539,604 567,573
Canada Wholesale 84,909 83,328
---------- ----------
Total Company $3,451,649 $3,335,525
========== ==========
8. Environmental Liability
During the first quarter of fiscal 2000, the Company became aware of
environmental issues at one of its non-retail real estate locations. The Company
obtained an environmental remediation report to enable it to assess the
potential environmental liability related to this property. Factors considered
in determining the liability included, among others, the following: whether the
Company had been designated as a potentially responsible party, the number of
potentially responsible parties designated at the site, the stage of the
proceedings and the available environmental technology.
During the first quarter of fiscal 2000, the Company assessed the likelihood
that a loss had been incurred at this site as probable and based on findings
included in remediation reports and discussion with legal counsel, estimated the
potential loss to be approximately $3 million on an undiscounted basis.
Accordingly, such amount was accrued at that time. At each balance sheet date
the Company assesses its exposure with respect to this environmental remediation
based on current available information. During the third quarter of fiscal 2000,
with respect to such review, it was determined that additional costs amounting
to approximately $1 million would be incurred to remedy these environmental
issues, and accordingly, this additional amount was accrued. The total accrued
liability of approximately $4 million is included in "Other non-current
liabilities" in the Consolidated Balance Sheets.
9. Project Financing Agreement
During the 40 weeks ended December 2, 2000, the Company entered into an
agreement with IBM Credit Corporation ("IBM Credit") whereby IBM Credit will
provide financing for software purchases and hardware leases primarily relating
to the Company's Great Renewal - Phase II supply chain and business process
initiative. Under this agreement, IBM Credit will finance software purchases and
hardware leases in the aggregate up to $71 million at an effective rate of 8.49%
per annum. The software purchases and hardware leases will occur from time to
time over the next four years. The Company is committed to make equal monthly
payments of $1.4 million through May 2005. Such payments are subject to change
based upon the timing and amount of funding from IBM Credit.
As of December 2, 2000, IBM Credit has funded $22.5 million for software
purchases and has leased hardware to the Company with a total fair market value
of $10.5 million. The leasing of the hardware under this agreement is being
accounted for as an operating lease in accordance with SFAS No. 13, "Accounting
for Leases."
10. Sale-Leaseback Transaction
On December 29, 2000, the Company entered into an agreement to sell certain
properties and subsequently lease them back from the purchaser. The properties
subject to this agreement have a carrying value of $18.9 million. Proceeds
received by the Company related to this transaction amounted to $26.4 million.
The resulting gain of $7.5 million will be deferred and amortized over the life
of the respective leases as a reduction of rental expense.
The resulting leases have terms of 20 years, with options to renew for
additional periods, and are being accounted for as operating leases in
accordance with SFAS No. 13, "Accounting for Leases." Future minimum lease
payments for these operating leases are as follows:
(Dollars in thousands)
Remainder of fiscal 2000 $ 487
Fiscal 2001 2,768
Fiscal 2002 2,768
Fiscal 2003 2,768
Fiscal 2004 2,768
Fiscal 2005 2,768
Thereafter 43,810
-------
Total $58,137
=======
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
12 Weeks Ended December 2, 2000 Compared to 12 Weeks Ended December 4, 1999
Sales for the third quarter ended December 2, 2000 of $2.4 billion increased $97
million or 4.1% from the prior year third quarter amount. The increase is
detailed in the following table:
Increase/ Increase/
(Decrease) (Decrease)
$ %
--------- --------
New stores (44) $115 4.9%
Same store sales 32 1.4
Wholesale sales 26 1.1
Canadian exchange rate (17) (0.7)
Closed stores (48) (59) (2.6)
---- -----
Total $ 97 4.1%
==== ===
Average weekly sales per supermarket were approximately $260,100 in the third
quarter of fiscal 2000 versus $247,100 for the corresponding period of the prior
year, an increase of 5.3%. Same store sales for Canadian operations increased
4.2% from the prior year and same store sales for U.S. operations increased 0.8%
from the prior year.
Gross margin as a percent of sales decreased 65 basis points to 28.35% in the
third quarter of fiscal 2000 from 29.00% for the third quarter of fiscal 1999.
This decrease was due to the increasingly competitive supermarket environment
and promotional programs that were less successful in generating the desired
sales expected from those types of programs. The gross margin dollar increase of
$12 million resulted from an increase in sales volume partially offset by a
decrease in the gross margin rate as well as a decrease in the Canadian
exchange rate. The U.S. operations gross margin increase of $15 million resulted
from an increase of $22 million due to higher sales volume partially offset
by a decrease of $7 million due to a lower gross margin rate. The Canadian
operations gross margin decrease of $3 million resulted from a decrease of $9
million due to a lower gross margin rate and a decrease of $4 million in the
Canadian exchange rate partially offset by an increase of $10 million due to
higher sales volume.
Store operating, general and administrative ("SG&A") expense was $691 million
for the third quarter of fiscal 2000 compared to $620 million for the
corresponding period in the prior year. As a percentage of sales, SG&A expense
increased from 26.59% in the third quarter of fiscal 1999 to 28.44% in the third
quarter of fiscal 2000.
The SG&A expense for the third quarter of fiscal 1999 included a net credit of
approximately $5 million relating to the Company's Great Renewal - Phase I store
closure initiatives ("GR I") as described in Footnote 5 of the Company's
Consolidated Financial Statements for the 12 and 40 week periods ended December
2, 2000. This net credit consisted of reversals of previously recorded
restructuring charges due to favorable progress in marketing and subleasing the
closed stores of approximately $22 million offset by approximately $11 million
of costs related to the store exiting charges and approximately $6 million of
store operating, general and administrative expense of the stores identified for
closure.
The SG&A expense for the third quarter of fiscal 2000 included approximately $18
million relating to the Company's Great Renewal - Phase II supply chain and
business process initiative ("GR II"). Such costs consisted primarily of
professional consulting fees and salaries, including related benefits, of
employees working full-time on the initiative.
Excluding the GR I and GR II charges noted above, as a percentage of sales, SG&A
expense increased from 26.97% in the third quarter of fiscal 1999 to 27.69% in
the third quarter of fiscal 2000. The increase of 72 basis points is primarily
due to higher occupancy and labor costs associated with the Company's new store
development program.
Interest expense increased $2.9 million or 14.4% from the corresponding period
of the prior year, primarily due to increased borrowings from banks.
The loss before income taxes for the third quarter ended December 2, 2000 was
$24 million compared to income before income taxes of $37 million for the
comparable period in the prior year for a decrease of $61 million. The loss was
attributable principally to lower gross margin, higher store operating, general
and administrative expense and increased interest expense.
The income tax benefit/provision recorded in the third quarter of fiscal years
2000 and 1999 reflect the Company's estimated expected annual tax rates applied
to its respective domestic and foreign financial results.
40 Weeks Ended December 2, 2000 Compared to 40 Weeks Ended December 4, 1999
Sales for the 40 weeks ended December 2, 2000 of $8.1 billion increased $338
million or 4.4% from the prior year. The increase is detailed in the following
table:
Increase/ Increase/
(Decrease) (Decrease)
$ %
---------- ----------
New stores (59) $444 5.7%
Same store sales 137 2.0
Wholesale sales 103 1.3
Canadian exchange rate (9) (0.1)
Closed stores (151) (337) (4.5)
---- -----
Total $338 4.4%
==== =====
Average weekly sales per supermarket were approximately $259,800 for the 40 week
period of fiscal 2000 versus $241,100 for the corresponding period of the prior
year, an increase of 7.8%. Same store sales for Canadian operations increased
4.0% from the prior year and same store sales for U.S. operations increased 1.5%
from the prior year.
Gross margin as a percent of sales increased 8 basis points to 28.66% for the 40
week period of fiscal 2000 from 28.58% for the 40 week period of fiscal 1999.
The gross margin dollar increase of $103 million resulted from increases in
sales volume and the gross margin rate partially offset by a decrease in the
Canadian exchange rate. The U.S. operations gross margin increase of $82
million resulted from an increase of $49 million due to higher sales volume
and $33 million due to a higher gross margin rate. The Canadian operations
gross margin increase of $21 million resulted from an increase of $42 million
due to higher sales volume partially offset by a decrease of $19 million
due to a lower gross margin rate and a decrease of $2 million in the Canadian
exchange rate.
SG&A expense was $2.3 billion for the 40 week period ended December 2, 2000
compared to $2.1 billion for the corresponding period of the prior year. As a
percentage of sales, SG&A expense increased from 27.64% in fiscal 1999 to 28.06%
in fiscal 2000.
The SG&A expense for the 40 week period of fiscal 1999 included approximately
$101 million relating to GR I, including approximately $56 million of costs
related to the store exiting charges and approximately $67 million of store
operating, general and administrative expense of the stores identified for
closure, partially offset by reversals of previously recorded restructuring
charges due to favorable progress in marketing and subleasing the closed stores
of approximately $22 million.
The SG&A expense for the 40 week period of fiscal 2000 included approximately
$52 million relating to GR II. Such costs included primarily professional
consulting fees and salaries, including related benefits, of employees working
full-time on the initiative. Also included in the fiscal 2000 expense was
approximately $4 million of estimated environmental clean up costs for a
non-retail property. Partially offsetting the fiscal 2000 expense was a reversal
of approximately $3.1 million of GR I charges originally recorded in fiscal 1998
resulting from a change in estimate related to the sale of one of the Company's
warehouses sold during the first quarter of fiscal 2000.
Excluding the charges noted above, as a percentage of sales, SG&A expense
increased from 26.88% for the 40 week period of fiscal 1999 to 27.40% for the 40
week period of fiscal 2000. The increase of 52 basis points is primarily due to
litigation and severance charges as well as higher labor and occupancy costs in
fiscal 2000.
Interest expense increased $11.7 million or 18.7% from the corresponding period
of the prior year, primarily due to the issuance of $200 million 9.375% Senior
Quarterly Interest Bonds on August 6, 1999 and increased borrowings from banks.
The loss before income taxes for the 40 week period ended December 2, 2000 was
$21 million compared to income before income taxes of $15 million for the
comparable period in the prior year, a decrease of $36 million. The loss is
attributable principally to the increases in store operating, general and
administrative expense and interest expense partially offset by higher gross
margin.
The income tax benefit/provision recorded in the first three quarters of 2000
and 1999 reflect the Company's estimated expected annual tax rates applied to
its respective domestic and foreign financial results.
Liquidity and Capital Resources
The Company ended the third quarter of fiscal 2000 with working capital of $91
million compared to $98 million at the beginning of the fiscal year. The Company
had cash and short-term investments aggregating $104 million at the end of the
third quarter of fiscal 2000 compared to $125 million as of fiscal 1999 year
end. Short-term investments were approximately $6 million and $27 million at
December 2, 2000 and February 26, 2000, respectively. The decrease in working
capital is attributable primarily to decreases in cash, short-term investments
and accounts receivable, and an increase in accounts payable partially offset by
an increase in inventories.
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 $493 million revolving credit agreement
(the "Credit Agreement") expiring June 10, 2002, with a syndicate of banks,
enabling it to borrow funds on a revolving basis sufficient to refinance
short-term borrowings. As of December 2, 2000, the Credit Agreement was
comprised of the U.S. credit agreement amounting to $415 million and the
Canadian credit agreement amounting to C$121 million (U.S. $78 million). As of
December 2, 2000, the Company had $320 million of borrowings under the Credit
Agreement. Accordingly, as of December 2, 2000, the Company had $173 million
available under the Credit Agreement. Borrowings under the agreement bears
interest at the weighted average rate of 7.15% as of December 2, 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 $55 million. As of December 2,
2000, the Company had $10 million outstanding and $45 million available in
uncommitted lines of credit.
As described in Footnote 9 of the Company's Consolidated Financial Statements
for the 12 and 40 week periods ended December 2, 2000, the Company entered into
an agreement with IBM Credit Corporation ("IBM Credit") whereby IBM Credit will
provide financing for software purchases and hardware leases primarily related
to GR II. Under this agreement, IBM Credit will finance software purchases and
hardware leases in the aggregate up to $71 million at an effective rate of 8.49%
per annum. As of December 2, 2000, IBM Credit has funded $22.5 million for
software purchases and has leased hardware to the Company with a total fair
market value of $10.5 million.
On November 1, 2000, the Company's Canadian subsidiary, The Great Atlantic &
Pacific Company of Canada, Limited, repaid its outstanding $75 million 5 year
Notes denominated in U.S. dollars. The repayment of these Notes was funded by
the Credit Agreement at an average rate of 6.55%.
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 December 2, 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 December 2, 2000.
The Company is currently negotiating a new, secured revolving credit agreement
to replace its existing facility that is expected to have covenants, terms and
conditions which reflect the Company's current operating environment and capital
programs. Although the Company cannot be certain of the final timing and terms
of such agreement, it expects to have the agreement in place prior to its fiscal
year end.
On September 7, 2000, Standard & Poor's Ratings Group ("S&P") lowered its rating
on the Company's debt to BB stable. At December 2, 2000, the Company's existing
senior unsecured debt rating was Ba1 with negative implications with Moody's
Investors Service ("Moody's") and BB stable with S&P. On December 15, 2000,
Moody's lowered its rating on the Company's debt to Ba3 under continued review.
On December 22, 2000, S&P lowered its rating on the Company's debt to BB with
negative implications. These rating changes raise the cost of borrowing under
the Credit Agreement by 50 basis points on the borrowed amount and 12 1/2 basis
points on the entire commitment. Future rating changes could affect the
availability and cost of financing to the Company.
For the 40 weeks ended December 2, 2000, capital expenditures totaled $326
million, which included 35 new stores and 37 major remodels and enlargements.
Capital expenditures are expected to be approximately $400 million for the
entire year.
As described in Footnote 10 of the Company's Consolidated Financial Statements
for the 12 and 40 week periods ended December 2, 2000, on December 29, 2000, the
Company entered into an agreement to sell certain properties and subsequently
lease them back from the purchaser. The properties subject to this agreement
have a carrying value of $18.9 million. Proceeds received by the Company related
to this transaction amounted to $26.4 million. The resulting gain of $7.5
million will be deferred and amortized over the life of the respective leases as
a reduction of rental expense. The Company is currently in discussions to enter
similar transactions with other owned properties.
On December 5, 2000, the Company's Board of Directors voted to discontinue
payment of the quarterly cash dividend on its common stock.
The Company believes that its anticipated cash resources will be sufficient for
GR II and other capital expenditure programs, as well as mandatory scheduled
debt repayments throughout fiscal 2000.
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 $700 million in notes as of December 2, 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 December 2, 2000, a 1% change in
LIBOR would result in interest expense fluctuating approximately $3.3 million
per year.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. For the 12 and 40 week periods ended
December 2, 2000, a change in the Canadian currency of 10% would have resulted
in a fluctuation in net income of $0.3 million and $1.5 million, respectively.
The Company does not believe that a change in the Canadian currency of 10% will
have a material effect on the financial position or cash flows of the Company.
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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings
On January 8, 2001, the United States Supreme Court denied the plaintiffs'
petition for certiorari in Shirley A. Lang, et al. v. Kohl's Food Stores,
Inc. and The Great Atlantic & Pacific Tea Company, Inc., which favorably
concludes this litigation for the Company.
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, alleging that the Company
and its subsidiary Shopwell, Inc., together with the Company's outside delivery
service Chelsea Trucking, Inc., violated New York law by failing to pay minimum
and overtime wages to individuals who deliver groceries at a Food Emporium store
in New York City. The complaint seeks a determination of violation of law, an
unspecified amount of restitution, an injunction and costs. A purported class
action lawsuit was filed on January 13, 2000 in the federal district court for
the Southern District of New York against the Company, Shopwell, Inc. and others
by Faty Ansoumana and others. The federal court action makes similar minimum
wage and overtime pay allegations under both federal and state law and extends
the allegations to various stores operated by the Company. In December 2000, the
plaintiffs in the federal court action accepted a $3 million offer of judgment
made by the Company, such offer being conditional upon the federal court
entering an order certifying a class consisting of the individuals who are the
subject of a pending motion by the plaintiffs for class certification. In the
event the Court enters the class certification order, this judgment will also
resolve all related claims of the New York Attorney General.
For a description of other legal matters previously reported during fiscal 2000,
reference should be made to the Company's filings on Form 10-Q for the quarters
ended June 17, 2000 and September 2, 2000.
ITEM 2 - Changes in Securities
None
ITEM 3 - Defaults Upon Senior Securities
None
ITEM 4 - Submission of Matters to a Vote of Security Holders
None - Matters were previously reported in the first quarter ended June 17,
2000, Form 10-Q report filed with the Commission.
ITEM 5 - Other Information
None
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits required by item 601 of Regulation S-K
Management Employment Agreements - Exhibit 10
(b) Reports on Form 8-K
None
<PAGE>
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 16, 2001 By: /s/ Kenneth A. Uhl
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
