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 June 16, 2001
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 June 16, 2001 the Registrant had a total of 38,347,216 shares of common
stock - $1 par value outstanding.
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)
16 Weeks Ended
---------------------------
June 16, June 17,
2001 2000
------------ ------------
Sales $3,388,294 $3,199,820
Cost of merchandise sold (2,427,272) (2,280,475)
---------- ----------
Gross margin 961,022 919,345
Store operating, general and
administrative expense (943,480) (881,532)
--------- ----------
Income from operations 17,542 37,813
Interest expense (29,060) (28,936)
Interest income 1,842 1,864
--------- ---------
(Loss) income before income taxes (9,676) 10,741
Benefit (provision) for income taxes 2,537 (5,157)
--------- ---------
Net (loss) income $(7,139) $5,584
======= ======
(Loss) earnings per share:
Net (loss) income per share -
basic and diluted $(0.19) $0.15
====== =====
Weighted average number of
common shares outstanding 38,347,216 38,347,216
Common stock equivalents 161,433 47,262
--------- ---------
Weighted average number of common and
common equivalent shares outstanding 38,508,649 38,394,478
========== ==========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Stockholders' Equity and Comprehensive (Loss) Income
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Unamort- Accumu-
ized ulated
Value of Other
Addit- Restrict- Compre- Total
ional ed Retain- hensive Stock
Common Paid-in Stock ed (Loss)/ holders'
Stock Capital Grant Earnings Income Equity
------ ------- -------- -------- ------- -------
FY 2001-16 Week Period
- ----------------------
Balance at
beginning of period
38,347,216 shares $38,347 $456,470 $ - $375,288 $(72,808) $797,297
Net loss (7,139) (7,139)
Other comprehensive
income:
Foreign currency
translation
adjustment 6,428 6,428
------- -------- ---- -------- -------- --------
Balance at end of $38,347 $456,470 $ - $368,149 $(66,380) $796,586
period ======= ======== ==== ======== ========= ========
FY 2000-16 Week Period
- ------------------------
Balance at
beginning of period
38,367,216 shares $38,367 $457,101 $(441) $411,861 $(60,696) $846,192
Net income 5,584 5,584
Other comprehensive
income:
Foreign currency
translation
adjustment (1,279) (1,279)
Minimum pension
liability adjustment 2,682 2,682
Reversal of restricted
stock grants (20) (631) 441 (210)
Cash dividends
($.10 per share) (3,835) (3,835)
------- -------- ----- -------- -------- --------
Balance at end of period $38,347 $456,470 $ - $413,610 $(59,293) 849,134
======= ======== ===== ======== ======== ========
Comprehensive (Loss) Income
- ---------------------------
16 Weeks Ended
---------------------------
June 16, June 17,
2001 2000
------------ ------------
Net (loss) income $(7,139) $5,584
Foreign currency translation adjustment 6,428 (1,279)
Minimum pension liability adjustment - 2,682
------- -------
Total comprehensive (loss) income $(711) $6,987
===== ======
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
June 16, February 24,
2001 2001
-------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and short-term investments $164,131 $131,550
Accounts receivable 180,292 183,382
Inventories 768,629 783,758
Prepaid expenses and other current assets 98,858 103,164
--------- ---------
Total current assets 1,211,910 1,201,854
--------- ---------
Property:
Property owned 1,791,996 1,805,255
Property leased under capital leases 84,425 84,758
--------- ---------
Property - net 1,876,421 1,890,013
Other assets 201,004 217,936
--------- ---------
Total assets $3,289,335 $3,309,803
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $5,243 $6,195
Current portion of obligations under capital leases 11,544 11,634
Accounts payable 553,207 566,482
Book overdrafts 133,944 108,448
Accrued salaries, wages and benefits 155,758 158,450
Accrued taxes 69,447 62,169
Other accruals 193,928 194,106
--------- ---------
Total current liabilities 1,123,071 1,107,484
--------- ---------
Long-term debt 896,924 915,321
Long-term obligations under capital leases 103,738 106,797
Other non-current liabilities 369,016 382,904
--------- ---------
Total liabilities 2,492,749 2,512,506
--------- ---------
Commitments and contingencies
Stockholders' 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 shares
at June 16, 2001 and February 24,2001,
respectively 38,347 38,347
Additional paid-in capital 456,470 456,470
Accumulated other comprehensive loss (66,380) (72,808)
Retained earnings 368,149 375,288
--------- ---------
Total stockholders' equity 796,586 797,297
--------- ---------
Total liabilities and stockholders' equity $3,289,335 $3,309,803
========== ==========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Cash Flows
(Dollars in thousands)
(Unaudited)
16 Weeks Ended
-------------------------------
June 16, 2001 June 17, 2000
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(7,139) $5,584
Adjustments to reconcile net (loss) income
to cash provided by operating activities:
Store/Facilities exit charge (reversal)
and asset write-off - (3,061)
Environmental charge - 3,029
Depreciation and amortization 82,205 76,648
Deferred income tax (benefit) provision (2,537) 3,725
Loss (gain) on disposal of owned property 1,468 (1,735)
Other changes in assets and liabilities:
Decrease in receivables 3,424 34,438
Decrease (increase) in inventories 16,145 (9,386)
(Increase) decrease in prepaid expenses
and other current assets (7,057) 2,587
Decrease in other assets 7,459 526
(Decrease) in accounts payable (14,513) (20,768)
(Decrease) in accrued salaries, wages
and benefits (2,906) (4,172)
Increase in accrued taxes 7,249 8,672
(Decrease) in other accruals and other
liabilities (13,600) (25,465)
Other operating activities, net 6,507 (1,296)
------- -------
Net cash provided by operating activities 76,705 69,326
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (80,918) (141,463)
Proceeds from disposal of property 33,774 15,911
------- -------
Net cash used in investing activities (47,144) (125,552)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt (5,000) (12,900)
Proceeds under revolving lines of credit 267,088 60,000
Payments on revolving lines of credit (261,108) (30,000)
Proceeds from long-term borrowings 460 9,906
Payments on long-term borrowings (20,789) (1,093)
Principal payments on capital leases (3,628) (3,392)
Increase in book overdrafts 25,401 20,740
Cash dividends - (3,835)
------- -------
Net cash provided by financing activities 2,424 39,426
Effect of exchange rate changes on cash and
short-term investments 596 (688)
------- -------
Net increase (decrease) in cash and
short-term investments 32,581 (17,488)
Cash and short-term investments at beginning
of period 131,550 124,603
------- -------
Cash and short-term investments at end of period $164,131 $107,115
======== ========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements for the 16 week periods ended June 16,
2001 and June 17, 2000 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 and the supply chain and business
process initiative as discussed herein and in the Management's Discussion and
Analysis section of this report. 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 2000 Annual
Report on Form 10-K.
Certain reclassifications have been made to the prior periods' financial
statements in order to conform to the current period presentation.
2. Income Taxes
The income tax provision/benefit recorded for the first quarter of fiscal years
2001 and 2000 reflects the Company's estimated expected annual tax rates applied
to its respective domestic and foreign financial results as well as a one-time
adjustment relating to an enacted federal tax rate reduction from the Canadian
government. This new legislation which became effective during the first quarter
of fiscal 2001 will reduce the Canadian federal corporate income tax rate by a
total of 7% from 28% to 21% by January 1, 2004. However, the tax benefit for
the first quarter of 2001 was decreased by $1.2 million to reflect the
reduction in value of the deferred Canadian tax asset (primarily relating to
NOL carryforwards) resulting from the lower rates. Excluding this adjustment
of the tax asset, the benefit from income taxes would have been $3.7 million or
38.6% of the loss before income taxes.
Subsequent to the end of the first quarter, the Ontario government enacted
corporate income tax rate changes, gradually reducing the rate from 14% to 8%
by January 1, 2005. The Company is in the process of quantifying the impact
this additional Canadian tax rate reduction will have on the financial
statements for the 12 weeks ending September 8, 2001.
3. Wholesale Franchise Business
As of June 16, 2001, the Company served 67 franchised stores. These franchisees
are required to purchase inventory exclusively from the Company, which acts as a
wholesaler to the franchisees. The Company had sales to these franchised stores
of $208 million and $188 million for the first quarters of fiscal 2001 and 2000,
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 $2.7 million and
$3.7 million, are included in accounts receivable at June 16, 2001 and February
24, 2001, respectively. The long-term portion of the inventory notes and
equipment leases, net of allowance for doubtful accounts, amounting to
approximately $50.2 million and $55.3 million are included in other assets at
June 16, 2001 and February 24, 2001, 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 July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets". This statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets. The
provisions of this statement are required to be applied by the Company starting
with fiscal 2002. This statement is required to be applied to all goodwill and
other intangible assets recognized in the Company's financial statements at the
date of adoption. At that time, goodwill will no longer be amortized, but will
be tested for impairment annually. Impairment losses for goodwill and
indefinite-lived intangible assets that arise due to the initial application of
this statement would be reported as resulting from a change in accounting
principle. The Company is currently assessing the impact this statement will
have on the Company's financial statements when it is adopted at the beginning
of fiscal 2002.
5. Accounting for Derivative and Hedging Activities
In June 1998, the FASB issued 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 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 delayed 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 was required to adopt SFAS 133 as amended in the first quarter of
fiscal 2001. Upon adoption, the Company did not have any derivative instruments
that resulted in a transition adjustment upon the adoption of this standard on
February 25, 2001. However, the DIG is continually interpreting SFAS 133.
Contracts that the Company has concluded are not derivatives could potentially
be classified as derivatives based on new interpretive guidance.
6. Store and Facilities Exit Costs - Great Renewal - Phase I
In May 1998, the Company initiated an 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 this assessment, in fiscal 1998, the Company
recorded a net charge of approximately $224 million related to the closure of
132 stores, two warehouse facilities and a coffee plant in the U.S. and a bakery
plant in Canada. Additionally, in fiscal 1999, the Company recorded an
additional charge of $16 million which included $5 million of net costs to exit
the Atlanta market (closure of 22 stores, a distribution center and
administrative office) and $11 million for additional severance costs related to
the 132 stores closed in fiscal 1998.
The Company paid $28.4 million of the total net severance charges from the time
of the original charges through the June 16, 2001, which resulted from the
termination of approximately 3,400 employees. The remaining severance liability
primarily relates to future obligations for early withdrawals from
multi-employer union pension plans.
The following reconciliation summarizes the activity related to the
aforementioned charges since the beginning of fiscal 2000:
Severance
Store and Facilities
(Dollars in thousands) Occupancy Benefits Occupancy Total
------------ ------------ ------------ -------
Reserve Balance at
Feb. 26, 2000 $103,453 $7,500 $3,567 $114,520
Addition (1) 5,062 - - 5,062
Utilization (4) (25,654) (4,779) (463) (30,896)
Adjustment (3) - - (3,104) (3,104)
--------- ------- ------- -------
Reserve Balance at
Feb. 24, 2001 82,861 2,721 - 85,582
Addition (1) 1,361 - - 1,361
Utilization (2) (7,975) (204) - (8,179)
------- ------- ------- -------
Reserve Balance at
June 16, 2001 $76,247 $2,517 $ - $78,764
======= ====== ===== =======
(1) The addition of $1.4 million and $5.1 million to store occupancy during
the first quarters of fiscal 2001 and 2000, respectively, represent the
present value of accrued interest related to lease obligations.
(2) Store occupancy utilization of $8.0 million represents lease and other
occupancy payments made during the first quarter of fiscal 2001.
(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 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) Store occupancy utilization of $25.7 million and facilities occupancy of
$0.5 million represent lease and other occupancy payments made during
fiscal 2000.
Based upon current available information, Management evaluated the reserve
balance of $78.8 million as of June 16, 2001 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 June 16, 2001, approximately $13.3 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 for the 16 weeks ended
June 16, 2001 and June 17, 2000 are the operating results of the one remaining
store that was identified for closure as part of this store and facilities exit
plan. This store subsequently closed during the second quarter of fiscal 2001.
The operating results of this store are as follows:
(In thousands) 16 Weeks Ended
--------------------------
June 16, June 17,
2001 2000
-------- --------
Sales $181 $214
==== ====
Operating Loss $(46) $(67)
==== ====
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 Canada 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. The Company measures segment
performance based upon operating profit.
Interim information on segments is as follows:
(Dollars in thousands)
16 Weeks Ended
------------------------------------------
June 16, June 17,
2001 2000
------------ ------------
Sales
U.S. Retail $2,629,928 $2,485,844
Canada Retail 550,577 525,716
Canada Wholesale 207,789 188,260
---------- ----------
Total Company $3,388,294 $3,199,820
========== ==========
Depreciation and amortization
U.S. Retail $71,660 $67,106
Canada Retail 10,545 9,542
Canada Wholesale - -
------- -------
Total Company $82,205 $76,648
======= =======
Income from operations
U.S. Retail $7,560 $21,204
Canada Retail 2,145 10,315
Canada Wholesale 7,837 6,294
------- -------
Total Company $17,542 $37,813
======= =======
(Loss) income before income taxes
U.S. Retail $(17,847) $(3,206)
Canada Retail 26 7,338
Canada Wholesale 8,145 6,609
------- -------
Total Company $(9,676) $10,741
======= =======
Capital expenditures
U.S. Retail $62,655 $120,678
Canada Retail 18,263 20,785
Canada Wholesale - -
------- --------
Total Company $80,918 $141,463
======= ========
June 16, February 24,
2001 2001
------------ ------------
Total assets
U.S. Retail $2,648,537 $2,679,217
Canada Retail 560,909 548,801
Canada Wholesale 79,889 81,785
---------- ----------
Total Company $3,289,335 $3,309,803
========== ==========
8. Supply Chain and Business Process Initiative - Great Renewal - Phase II
On March 13, 2000, the Company announced GR II, an initiative to develop a
state-of-the-art supply and business management infrastructure.
During fiscal 2000, an agreement was entered into which provided financing for
software purchases and hardware leases up to $71 million in the aggregate
primarily relating to GR II. At that time, software purchases and hardware
leases were to be financed at an effective rate of 8.49% per annum, were to
occur from time to time through 2004, and were to have equal monthly payments of
$1.4 million. In May 2001, the agreement was amended to include only hardware
leases. The amounts previously funded which relate to software purchases were to
be repaid over the next several months. The monthly payment amount was amended
to reflect expected utilization related to hardware leases, and, as such, these
payments are expected to change based upon the timing and amount of such
funding. As of June 16, 2001, approximately $20 million was available for future
financing. 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".
9. Sale-Leaseback Transaction
During the fourth quarter of fiscal 2000, the Company sold 12 properties and
simultaneously leased them back from the purchaser. The properties subject to
this sale had a carrying value of approximately $68 million. Net proceeds
received by the Company related to this transaction amounted to approximately
$113 million. Of the 12 properties sold, 11 were sold for a profit resulting in
a gain after deducting expenses of approximately $46 million. This gain will be
deferred and amortized over the life of the respective leases as a reduction of
rental expense. One property in the aforementioned transaction was sold at a
loss of approximately $3 million after expenses. Since the fair value of this
property was less than its carrying value, the Company recognized this loss in
full during fiscal 2000.
During the first quarter of fiscal 2001, the Company sold 4 additional
properties and simultaneously leased them back from the purchaser. The
properties subject to this sale had a carrying value of approximately $19
million. Net proceeds received by the Company related to these transactions
amounted to approximately $26 million. Of the 4 properties sold, 3 were sold for
a profit resulting in a gain after deducting expenses of approximately $10
million. This gain will be deferred and amortized over the life of the
respective leases as a reduction of rental expense. One property in the
aforementioned transaction was sold at a loss of approximately $4 million after
expenses. This loss was anticipated at the end of fiscal 2000, and, accordingly,
was recognized in full at that time since the carrying value of such property
exceeded its fair value less the cost of disposal.
During the remainder of fiscal 2001, the Company expects to enter into similar
transactions with two other owned properties.
The resulting leases of the 16 properties sold in fiscal 2000 and 2001 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) Fiscal
---------------------- -------
2001 $10,605
2002 15,907
2003 15,907
2004 15,907
2005 15,907
2006 and thereafter 254,610
-------
Total $328,843
========
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
16 Weeks Ended June 16, 2001 Compared to 16 Weeks Ended June 17, 2000
Sales for the 16 weeks ended June 16, 2001 of $3,388 million increased $188.5
million or 5.89% from sales of $3,200 million for the 16 weeks ended June 17,
2000. The increase in sales is primarily attributable to the opening of 47 new
stores in fiscal 2000 and 6 new stores in fiscal 2001, increasing sales by $204
million. Additionally, comparable store sales for the first quarter of fiscal
2001, which include replacement stores, increased $109 million or 3.8% when
compared to the first quarter of fiscal 2000 (2.5% in the U.S. and 9.8% in
Canada). This increase was partially offset by the closure of 49 stores in
fiscal 2000 and 12 stores in fiscal 2001 which decreased sales $93 million and
the unfavorable effect of the Canadian exchange rate which decreased sales $25
million.
Average weekly sales per supermarket were approximately $272,800 for the 16 week
period ended June 16, 2001 versus $257,300 for the corresponding period of the
prior year, an increase of 6.0%. Sales in the U.S. during the first quarter of
fiscal 2001 increased by $144.1 million or 5.8% compared to the first quarter of
fiscal 2000. Sales in Canada during the first quarter of fiscal 2001 increased
$44.4 million or 6.2% compared to the first quarter of fiscal 2000.
Gross margin as a percentage of sales decreased 37 basis points to 28.36% for
the 16 week period ended June 16, 2001 from 28.73% for the 16 week period ended
June 17, 2000. The gross margin dollar increase of $41.7 million resulted from
an increase in sales volume partially offset by decreases in the gross margin
rate and the Canadian exchange rate. The U.S. operations gross margin increase
of $37.8 million resulted from an increase of $44.0 million due to higher sales
volume offset by a decrease of $6.2 million due to a lower gross margin rate.
The Canadian operations gross margin increase of $3.8 million resulted from an
increase of $18.4 million due to higher sales volume partially offset by a
decrease of $6.4 million due to a lower gross margin rate and a decrease of $8.2
million from fluctuations in the Canadian exchange rate.
Store operating, general and administrative expense ("SG&A") was $943.5 million
for the 16 weeks ended June 16, 2001 compared to $881.5 million for the
corresponding period of the prior year. As a percentage of sales, SG&A increased
from 27.55% in the first quarter of fiscal 2000 to 27.85% in the first quarter
of fiscal 2001.
Included in cost of merchandise sold and SG&A are costs relating to the Great
Renewal - Phase II supply chain and business process initiative ("GR II") of
$4.5 million and $27.3 million for the 16 weeks ended June 16, 2001,
respectively, and $0 and $17.1 million for the 16 weeks ended June 17, 2000,
respectively. The costs included in cost of merchandise sold, which lowered
gross margin as a percentage of sales by 14 basis points, were incurred to mark
down inventory to be discontinued as a result of detailed category management
studies. The costs included in SG&A primarily included professional consulting
fees and salaries, including related benefits, of employees working full-time on
the initiative. Also included in the first quarter of fiscal 2000 SG&A was $3.0
million of estimated environmental clean up costs for a non-retail property
partially offset by a reversal of $3.1 million of charges related to the Great
Renewal - Phase I store closure initiative ("GR I") originally recorded in
fiscal 1998, resulting primarily from a change in estimate related to the sale
of a warehouse sold during the first quarter of fiscal 2000. Excluding the
charges described above, as a percentage of sales, SG&A increased slightly from
27.02% for the 16 week period ended June 17, 2000 to 27.04% for the 16 week
period ended June 16, 2001.
Interest expense of $29.1 million for the first quarter of fiscal 2001 increased
slightly from the prior year quarter amount of $28.9 million.
The loss before income taxes for the 16 week period ended June 16, 2001 was $9.7
million compared to income before income taxes of $10.7 million for the
comparable period in the prior year, a decrease of $20.4 million. The loss is
attributable principally to the increase in SG&A and lower gross margin.
The benefit from income taxes for the 16 weeks ended June 16, 2001 was $2.5
million compared to a provision for income taxes of $5.2 million. The effective
tax rates for the first quarters of fiscal 2001 and 2000 were 26.2% and 48.0%,
respectively. This benefit from income taxes for the first quarter of fiscal
2001 and the provision for income taxes for the first quarter of fiscal 2000
reflect the estimated expected annual tax rates applied to its respective
domestic and foreign financial results as well as an adjustment relating to a
reduction in the Canadian federal corporate income tax rate. This new
legislation which was enacted during the first quarter of fiscal 2001 will
reduce the Canadian federal corporate income tax rate by a total of 7% from 28%
to 21% by January 1, 2004. The tax benefit for the first quarter of 2001 was
decreased by $1.2 million to reflect the reduction in value of the deferred
Canadian tax asset (primarily relating to NOL carryforwards) resulting from the
lower rates. Excluding this adjustment of the tax asset, the benefit
from income taxes would have been $3.7 million or 38.6% of the loss before
income taxes.
Subsequent to the end of the first quarter, the Ontario government enacted
corporate income tax rate changes, gradually reducing the rate from 14% to 8%
by January 1, 2005. The Company is in the process of quantifying the impact
this additional Canadian tax rate reduction will have on the financial
statements for the 12 weeks ending September 8, 2001.
Based on these overall results, the net loss for the 16 weeks ended June 16,
2001 was $7.1 million or $0.19 per share - basic and diluted, as compared to net
income of $5.6 million or $0.15 per share - basic and diluted. The decrease in
net income of $12.7 million from the first quarter of fiscal 2000 to the first
quarter of fiscal 2001 is attributable principally to the increase in SG&A and
the lower gross margin rate as well as the change in the Canadian corporate
income tax rate.
Liquidity and Capital Resources
The Company had working capital of $88.8 million at June 16, 2001 compared to
$94.4 million at fiscal 2000 year end. The Company had cash and short-term
investments aggregating $164.1 million at June 16, 2001 compared to $131.6
million as of fiscal 2000 year end, including $34.5 million in short-term
investments at June 16, 2001 compared to no short-term investments at February
24, 2001. The decrease in working capital is attributable primarily to increases
in book overdrafts and other accruals, and decreases in accounts receivable,
inventories and prepaid expenses and other current assets. This is partially
offset by increases in short-term investments and deferred tax asset, and
decreases in accounts payable and current portion of long-term debt.
The Company has a $426 million secured revolving credit agreement (the "Secured
Credit Agreement") expiring December 31, 2003, with a syndicate of lenders,
enabling it to borrow funds on a revolving basis sufficient to refinance
short-term borrowings and provide working capital as needed. This agreement is
secured primarily by inventory and company-owned real estate. The Secured Credit
Agreement was comprised of a U.S. credit agreement amounting to $340 million and
a Canadian credit agreement amounting to C$131 million (U.S. $86 million at June
16, 2001). As of June 16, 2001, the Company had $196 million of borrowings under
the Secured Credit Agreement. Accordingly, as of June 16, 2001, after reducing
availability for outstanding letters of credit, the Company had $205 million
available under the Secured Credit Agreement. Borrowings under the
agreement bear interest at the weighted average rate of 6.78% as of June 16,
2001 based on the variable LIBOR pricing.
The Company's loan agreements and certain of its notes contain various financial
covenants which require, among other things, minimum fixed charge coverage and
maximum levels of leverage and capital expenditures. At June 16, 2001, the
Company was in compliance with the covenants on the notes and the Secured Credit
Agreement.
As described in Note 8 of the Consolidated Financial Statements, during fiscal
2000, an agreement was entered into which provided financing for software
purchases and hardware leases up to $71 million in the aggregate primarily
relating to GR II. At that time, software purchases and hardware leases were to
be financed at an effective rate of 8.49% per annum, were to occur from time to
time through 2004, and were to have equal monthly payments of $1.4 million. In
May 2001, the agreement was amended to include only hardware leases. The amounts
previously funded which relate to software purchases were to be repaid over the
next several months. The monthly payment amount was amended to reflect expected
utilization related to hardware leases, and, as such, these payments are
expected to change based upon the timing and amount of such funding. As of June
16, 2001, approximately $20 million was available for future financing.
The Company has filed two Shelf Registration Statements dated January 23, 1998
and June 23, 1999, allowing it to offer up to $350 million of debt and/or equity
securities as of June 16, 2001 at terms determined by market conditions at the
time of sale.
As described in Note 9 of the Consolidated Financial Statements, during the
fourth quarter of fiscal 2000, the Company sold 12 properties and simultaneously
leased them back from the purchaser. Net proceeds received by the Company
related to this transaction amounted to approximately $113 million.
Additionally, during the first quarter of fiscal 2001, the Company sold 4
properties and simultaneously leased them back from the purchaser. Net proceeds
received by the Company related to these transactions amounted to approximately
$26 million. The Company has or expects to enter into similar transactions with
two other owned properties in fiscal 2001 with expected gross proceeds of
approximately $15 million.
During the first quarter of fiscal 2001, the Company funded its capital
expenditures, debt repayments, and GR II expenses through internally generated
funds combined with proceeds from disposals of property, bank borrowings, and
revolving lines of credit. Capital expenditures totaled $81 million during the
first quarter of fiscal 2001, which included 6 new supermarkets, and 9 major
remodels or enlargements, and the Company's capital expenditures related to GR
II. Capital expenditures are expected to be approximately $200 million for the
remainder of the fiscal year which includes approximately 20 new supermarkets,
as well as capital expenditures related to GR II.
During the first quarter of fiscal 2001, the Company incurred expenses related
to GR II of approximately $32 million before tax benefits. For the remainder of
fiscal 2001, the Company plans to incur an additional $70 million approximately,
before tax benefits, of GR II expenses.
As part of the ongoing process of reviewing the performance and potential of
each of its businesses and individual stores, the Company is particularly
focusing on stores opened in the last three years which, as has been previously
stated, include a number of stores that have not achieved expectations. As part
of this review, stores may be classified as underperforming as defined by the
Company. For each store identified as underperforming, a decision will be made
to either fix, sell or close it. As such there is potential for significant
additional store disposals or closures during the remainder of fiscal 2001.
On December 5, 2000, the Board of Directors voted to discontinue payment of the
quarterly cash dividend on its common stock. As such, the Company does not
expect to pay dividends during fiscal 2001.
The Company's existing senior debt rating was B2 with negative implications with
Moody's Investors Service and BB with negative implications with Standard &
Poor's Ratings Group as of June 16, 2001. Future rating changes could affect the
availability and cost of financing to the Company.
The Company believes that its current cash resources, including the funds
available under the Secured Credit Agreement, together with cash generated from
operations, will be sufficient for the Company's 2001 GR II and other capital
expenditure programs and mandatory scheduled debt repayments throughout fiscal
2001.
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 June 16, 2001
because they are at fixed interest rates. However, the Company does have cash
flow exposure on its committed and uncommitted bank lines of credit due to its
variable LIBOR pricing. Accordingly, as of June 16, 2001, a 1% change in LIBOR
would result in interest expense fluctuating approximately $2.0 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 16 week period ended June 16, 2001,
a change in the Canadian currency of 10% would have resulted in a fluctuation in
net income of $0.3 million. 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.
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
None
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
The Great Atlantic & Pacific Tea Company, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
Date: July 31, 2001 By: /s/ Kenneth A. Uhl
------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)