-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PcKw+k9xhTABJzASY4ZZG1XdxOUPw5wY4RaiIBo3I48nxhEixC0OH9JwE/C54pwi 5lXurbcMDYNfhH+yQm0zAQ== 0000043300-98-000009.txt : 19980804 0000043300-98-000009.hdr.sgml : 19980804 ACCESSION NUMBER: 0000043300-98-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980620 FILED AS OF DATE: 19980803 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT ATLANTIC & PACIFIC TEA CO INC CENTRAL INDEX KEY: 0000043300 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 131890974 STATE OF INCORPORATION: MD FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04141 FILM NUMBER: 98676197 BUSINESS ADDRESS: STREET 1: 2 PARAGON DR CITY: MONTVALE STATE: NJ ZIP: 07645 BUSINESS PHONE: 2015739700 MAIL ADDRESS: STREET 1: 2 PARAGON DRIVE CITY: MONTVALE STATE: NJ ZIP: 07645 10-Q 1 Conformed Copy FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended June 20, 1998 Commission File Number 1-4141 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. ---------------------------------------------- (Exact name of registrant as specified in charter) Maryland 13-1890974 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2 Paragon Drive, Montvale, New Jersey 07645 - ------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 201-573-9700 ------------ - ------------------------------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES XXX NO --------- --------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at June 20, 1998 ----- ---------------------------- Common stock - $1 par value 38,252,966 shares THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STATEMENTS OF CONSOLIDATED OPERATIONS & RETAINED EARNINGS (Dollars in thousands, except share amounts) (Unaudited) 16 Weeks Ended June 20, June 14, 1998 1997 ---------- ---------- Sales $3,078,386 $3,104,591 Cost of merchandise sold (2,192,073) (2,220,375) ---------- ---------- Gross margin 886,313 884,216 Store operating, general and administrative expense (842,082) (831,210) ---------- ---------- Income from operations 44,231 53,006 Interest expense (21,032) (24,418) Interest income 2,078 2,265 ---------- ---------- Income before income taxes 25,277 30,853 Provision for income taxes (6,108) (8,066) ---------- ---------- Net income 19,169 22,787 Retained earnings at beginning of period 495,510 447,768 Cash dividends (3,825) (3,825) ---------- ---------- Retained earnings at end of period $ 510,854 $ 466,730 ========== ========== Earnings per share: Net income per share-basic $ .50 $ .60 ========== ========== Net income per share-diluted $ .50 $ .60 ========== ========== Cash dividends $ .10 $ .10 ========== ========== Weighted average number of common shares outstanding 38,252,966 38,248,966 Common stock equivalents 88,161 3,756 Weighted average number of common and common equivalent ---------- ---------- shares outstanding 38,341,127 38,252,722 ========== ========== See Notes to Quarterly Report on Page 5. - 1 - THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. CONSOLIDATED BALANCE SHEETS --------------------------- (Dollars in thousands) June 20, 1998 Feb. 28, 1998 ------------- ------------- (Unaudited) ASSETS - ------ Current assets: Cash and short-term investments $ 140,350 $ 70,937 Accounts receivable 217,635 227,703 Inventories 881,606 882,229 Prepaid expenses and other assets 31,895 36,358 ---------- ---------- Total current assets 1,271,486 1,217,227 ---------- ---------- Property: Property owned 1,534,253 1,506,819 Property leased 86,169 90,058 ---------- ---------- Property-net 1,620,422 1,596,877 Other assets 181,981 181,149 ---------- ---------- Total Assets $3,073,889 $2,995,253 ========== ========== See Notes to Quarterly Report on Page 5. -2- THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. CONSOLIDATED BALANCE SHEETS --------------------------- (Dollars in thousands) June 20, 1998 Feb. 28, 1998 -------------- ------------- (Unaudited) LIABILITIES & SHAREHOLDERS' EQUITY - ---------------------------------- Current liabilities: Current portion of long-term debt $ 17,910 $ 16,824 Current portion of obligations under capital leases 12,125 12,293 Accounts payable 508,296 441,149 Book overdrafts 145,543 151,846 Accrued salaries, wages and benefits 147,531 146,064 Accrued taxes 64,717 57,856 Other accruals 121,175 129,098 ---------- ---------- Total current liabilities 1,017,297 955,130 ---------- ---------- Long-term debt 702,335 695,292 ---------- ---------- Obligations under capital leases 115,815 120,980 ---------- ---------- Deferred income taxes 122,137 120,618 ---------- ---------- Other non-current liabilities 180,230 176,601 ---------- ---------- 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 38,252,966 38,253 38,253 Capital surplus 453,894 453,894 Cumulative translation adjustment (60,716) (54,815) Minimum pension liability adjustment (6,210) (6,210) Retained earnings 510,854 495,510 ---------- ---------- Total shareholders' equity 936,075 926,632 ---------- ---------- Total liabilities and shareholders' equity $3,073,889 $2,995,253 ========== ========== See Notes to Quarterly Report on Page 5. -3- THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) 16 Weeks Ended June 20, 1998 June 14, 1997 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 19,169 $ 22,787 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 72,194 71,439 Deferred income tax provision 3,390 5,541 (Gain) loss on disposal of owned property (3,295) 1,013 (Increase)decrease in receivables 8,731 (6,272) Increase in inventories (3,055) (19,281) (Increase) decrease in prepaid expenses and other current assets 3,460 (13,775) (Increase) decrease in other assets (2,115) 640 Increase in accounts payable 69,736 26,460 Decrease in accrued salaries, wages and benefits (789) (3,329) Increase in accrued taxes 7,007 9,324 Increase in other accruals and other liabilities 4,129 7,158 Other operating activities, net (1,758) 127 --------- --------- Net cash provided by operating activities 176,804 101,832 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property (107,030) (83,221) Proceeds from disposal of property 5,010 1,823 --------- --------- Net cash used in investing activities (102,020) (81,398) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in short-term debt 26,500 (72,000) Proceeds under revolving lines of credit 160,000 41,148 Payments on revolving lines of credit (180,000) (173,641) Proceeds from long-term borrowings 3,556 301,379 Payments on long-term borrowings (1,927) (2,420) Principal payments on capital leases (3,744) (3,825) Decrease in book overdrafts (4,419) (29,654) Deferred financing fees - (2,434) Proceeds from stock options exercised - 35 Cash dividends (3,825) (3,825) --------- --------- Net cash provided by (used in) financing activities (3,859) 54,763 --------- --------- Effect of exchange rate changes on cash and short-term investments (1,512) (133) --------- --------- NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS 69,413 75,064 Cash and Short-Term Investments at Beginning of Period 70,937 98,830 --------- --------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 140,350 $ 173,894 ========= ========= See Notes to Quarterly Report on Page 5. -4- THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. NOTES TO QUARTERLY REPORT ------------------------- 1) BASIS OF PRESENTATION The consolidated financial statements for the 16 week period ended June 20, 1998 and June 14, 1997 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. 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 1997 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 in the first quarter of fiscal years 1998 and 1997 reflect the Company's estimated expected annual tax rates applied to their respective domestic and foreign financial results. The first quarter 1998 and 1997 income tax provisions mainly reflect the taxes on U.S. income, as the Canadian income tax expense is principally offset by the reversal of its deferred tax asset valuation allowance. During the first quarter of fiscal 1998 and 1997, the Canadian operations generated pretax earnings and reversed a portion of the valuation allowance to the extent of such pretax earnings. The reversal of the valuation allowance amounted to $4.9 million and $5.2 million for the first quarter of fiscal years 1998 and 1997, respectively. Although Canada generated pretax earnings, 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 earnings. Accordingly, at June 20, 1998 the Company is continuing to fully reserve its Canadian net deferred tax asset. The valuation allowance will be adjusted when and if, in the opinion of Management, significant positive evidence exists which indicates that it is more likely than not that the Company will be able to realize the Canadian net deferred tax asset. The positive evidence that Management believes is necessary in order to reverse some or all of the Canadian deferred tax asset valuation allowance is a trend in earnings to a level which would allow Management to conclude that it is more likely than not that a portion or all of the deferred tax assets would be realized. The Canadian pretax income for financial statement purposes is higher than the taxable income for tax purposes due to certain differences between the financial statement and income tax treatment of certain items. This is of further significance since the largest portion of the Canadian deferred tax asset relates to net operating loss carryforwards which expire between fiscal 1999 and fiscal 2002. -5- 3) FOOD BASICS FRANCHISING As of June 20, 1998, the Company served 53 Food Basics franchised stores. These franchisees are required to purchase inventory exclusively from the Company which acts as a wholesaler to the franchisees. The Company had sales to these franchised stores of $122 million and $99 million for the 16 week period ended in fiscal 1998 and 1997, 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 nominal fee which mainly represents the reimbursement of costs incurred to provide such services. Included in other assets are Food Basics franchising business receivables, net of allowance for doubtful accounts, amounting to approximately $34.3 million and $37.6 million at June 20, 1998 and February 28, 1998, respectively. The inventory notes are collaterized by the inventory in the stores, while the equipment lease receivables are collateralized by the equipment in the stores. The current portions of the inventory notes and equipment leases of approximately $1.8 million and $1.9 million are included in accounts receivable at June 20, 1998 and February 28, 1998, 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 PRONOUNCEMENT Effective March 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement requires that all components of comprehensive income be reported prominently in the financial statements. Currently, the Company has other comprehensive income relating to foreign currency translation adjustment. The Company's total comprehensive income for the 16 week period of fiscal 1998 and 1997 was as follows (in thousands): 16 Weeks Ended ----------------------------------- June 20, 1998 June 14, 1997 ---------------- ------------------ Net income $19,169 $22,787 Foreign currency translation adjustment (5,901) (633) --------- --------- Total comprehensive income $13,268 $22,154 ========== ========= In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). This Statement requires that all derivative instruments be measured at fair value and recognized in the statement of financial position as either assets or liabilities. The Company is currently studying the effects of SFAS No. 133 on its cross-currency and interest rate swaps and expects to adopt SFAS No. 133 in fiscal 2000. -6- THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. ITEM 2 - ------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS 16 WEEKS ENDED JUNE 20, 1998 ---------------------------- OPERATING RESULTS Sales for the first quarter ended June 20, 1998 of $3.1 billion decreased $26 million or 0.8% from the prior year first quarter. The opening of 21 stores in new market areas since the beginning of fiscal 1997 added approximately $61 million or 2.0% to sales in the first quarter of fiscal 1998. In addition, wholesale sales to the Food Basics franchised stores increased $23 million or 23% to $122 million for the 16 weeks ended June 20, 1998, which increased total Company sales by 0.7%. These increases were partially offset by the closure of 75 stores, excluding replacement stores, since the beginning of fiscal 1997, of which 11 have been sold in the Carolina market, which reduced total sales by approximately $77 million or 2.5% in the first quarter of fiscal 1998. A decrease in the Canadian exchange rate reduced first quarter fiscal 1998 sales by $23 million. In addition, same store sales ("same store sales" referred to herein include replacement stores) decreased 0.5% or $14 million from the same period last year. Average weekly sales per supermarket were approximately $203,000 versus $197,000 for the corresponding period of the prior year resulting in a 3% increase. Same store sales for Canadian operations increased 4.5% from the prior year while same store sales for U.S. operations declined 1.5% from the prior year. Gross margin as a percent of sales increased 31 basis points to 28.79% in the first quarter of fiscal 1998 from 28.48% for the first quarter of fiscal 1997, resulting primarily from higher margins and a better mix of higher margin items. The gross margin dollar increase of $2 million resulted from an increase in the gross margin rate of $11 million partially offset by a decrease in sales volume which reduced gross margin by $4 million and a decrease in the Canadian exchange rate which decreased gross margin by $5 million. The U.S. operations accounted for the entire $2 million gross margin increase as the increase in the gross margin rate of $16 million was partially offset by a sales volume decrease which reduced gross margin by $14 million. The Canadian operations increase in sales volume resulted in an increase in gross margin of $10 million, which was fully offset by a decrease in the gross margin rate of $5 million and a decline in the Canadian exchange rate decreasing gross margin by $5 million. Store operating, general, and administrative expense increased $11 million or 58 basis points to 27.35% from 26.77% for the prior year. This increase is primarily from higher occupancy costs, labor related costs and store closing costs, partially offset by a gain on an asset sale. Interest expense decreased $3 million or 14% from the previous year, primarily due to a decrease in average debt outstanding of $79 million for the sixteen week period in the first quarter 1998 as compared to the first quarter 1997. Interest income of $2 million remained consistent with the prior year. -7- Income before income taxes for the first quarter ended June 20, 1998 was $25 million compared to $31 million for the comparable period in the prior year for a decrease of approximately $6 million or 18%. The decrease is mainly the result of higher store operating, general and administrative expenses of $11 million, partially offset by higher gross margin of $2 million and lower interest expense of $3 million. The income tax provisions recorded in the first quarter of fiscal years 1998 and 1997 reflect the Company's estimated expected annual tax rates applied to their respective domestic and foreign financial results. The effective tax rate for the first quarter of fiscal 1998 was 24.2% versus an effective tax rate of 26.1% for the first quarter of fiscal 1997. The decrease in the effective tax rate is the result of the higher earnings provided by the Canadian operations. The first quarter 1998 and 1997 income tax provisions mainly reflect taxes on U.S. income, as the Canadian income tax expense is principally offset by the reversal of its deferred tax asset valuation allowance. During the first quarter of fiscal 1998 and 1997 the Canadian operations generated pretax earnings and reversed a portion of the valuation allowance to the extent of such pretax earnings. The reversal of the valuation allowance amounted to $4.9 million and $5.2 million for the first quarter of fiscal years 1998 and 1997, respectively. Although Canada generated pretax earnings, 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 earnings. Accordingly, at June 20, 1998 the Company is continuing to fully reserve its Canadian net deferred tax asset. The valuation allowance will be adjusted when and if, in the opinion of Management, significant positive evidence exists which indicates that it is more likely than not that the Company will be able to realize the Canadian net deferred tax asset. The positive evidence that Management believes is necessary in order to reverse some or all of the Canadian deferred tax asset valuation allowance is a trend in earnings to a level which would allow Management to conclude that it is more likely than not that a portion or all of the deferred tax assets would be realized. The Canadian pretax income for financial statement purposes is higher than the taxable income for tax purposes due to certain differences between the financial statement and income tax treatment of certain items. This is of further significance since the largest portion of the Canadian deferred tax asset relates to net operating loss carryforwards which expire between fiscal 1999 and fiscal 2002. LIQUIDITY AND CAPITAL RESOURCES The Company ended the first quarter of fiscal 1998 with working capital of $254 million compared to $262 million at the beginning of the fiscal year. The Company had cash and short-term investments aggregating $140 million at the end of the first quarter of fiscal 1998 compared to $71 million as of fiscal 1997 year end. Short-term investments were approximately $31 million and $20 million at June 20, 1998 and February 28, 1998, respectively, and consisted primarily of commercial paper. -8- The Company has an unsecured five year $465 million U.S. credit agreement and a five year C$50 million Canadian 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 June 20, 1998, the Company had $70 million outstanding against the Credit Agreement. Accordingly, as of June 20, 1998, the Company had $430 million available under the Credit Agreement. In addition to the Credit Agreement, the Company also has various uncommitted lines of credit with numerous banks. As of June 20, 1998, the Company had $64 million outstanding on the uncommitted lines of credit. The Company has an additional $97 million available in uncommitted lines of credit as of June 20, 1998. The Company's Credit 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 was in compliance with all such covenants as of June 20, 1998. On July 1, 1998, Moody's Investor's Service downgraded the Company's existing senior debt rating to Ba1 from Baa3. The Company's rating from Standard & Poor's remained unchanged from the fiscal year end rating of BBB-. Rating changes could affect the availability and cost of financing to the Company. For the 16 weeks ended June 20, 1998, capital expenditures totaled $107 million, which included 7 new stores and 28 remodels and enlargements. Currently, the Company expects to achieve its fiscal 1998 planned capital expenditures of approximately $300 million. Accordingly, the Company expects to have capital expenditures of approximately $193 million throughout the remainder of fiscal 1998. These available cash resources, together with income from operations, are sufficient for the Company's capital expenditure program, mandatory scheduled debt repayments and dividend payments for fiscal 1998. -9- THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. PART II. OTHER INFORMATION --------------------------- Item 1. Legal Proceedings ----------------- None Item 2. Changes in Securities --------------------- None Item 3. Defaults Upon Senior Securities ------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders ---------------------------------------------------- At its annual meeting of Shareholders, held on July 14, 1998, there were 35,533,143 shares or 92.9% of the 38,252,966 shares outstanding and entitled to vote represented either in person or by proxy. The 11 Board of Directors nominated to serve for a one-year term were all elected, with each receiving an affirmative vote of at least 99.3% of the shares present. Deloitte & Touche LLP was re- elected as the Company's independent auditor by at least 99.9% of the shares present. Item 5. Other Information ----------------- None Item 6. Exhibits and Reports on Form 8-K -------------------------------- None -10- 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: August 3, 1998 By: /s/ Kenneth A. Uhl --------------------------------------- Kenneth A. Uhl, Vice President and Controller (Chief Accounting Officer) -12- EX-27 2
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GREAT ATLANTIC AND PACIFIC TEA COMPANY, INC. 10-Q FOR THE FIRST QUARTER ENDED JUNE 20, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 3-MOS FEB-27-1999 JUN-20-1998 140350 0 217635 0 881606 1271486 1620422 0 3073889 1017297 818150 0 0 38253 897822 3073889 3078386 3078386 (2192073) (2192073) (842082) 0 (18954) 25277 (6108) 19169 0 0 0 19169 .50 .50
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