Executed Copy
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended December 3, 1994 Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
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(Exact name of registrant as specified in charter)
Maryland 13-1890974
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive, Montvale, New Jersey 07645
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 201-573-9700
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Former name, former address and former fiscal year, if changed since last
report.
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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 3, 1994
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Common stock - $1 par value 38,220,333 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 per share figures)
(Unaudited)
12 Weeks Ended 40 Weeks Ended
December 3, December 4, December 3, December 4,
1994 1993 1994 1993
----------- ----------- ----------- -----------
Sales $2,345,597 $2,342,935 $7,961,870 $8,021,567
Cost of merchandise sold (1,675,025) (1,677,356) (5,697,743) (5,724,341)
---------- ---------- ---------- ----------
Gross margin 670,572 665,579 2,264,127 2,297,226
Store operating, general and
administrative expense
(Note 4) (688,140) (652,193) (2,224,049) (2,212,057)
Write-off of goodwill and
long-lived assets (Note 3) (127,000) - (127,000) -
---------- ---------- ---------- ----------
Income (loss) from operations (144,568) 13,386 (86,922) 85,169
Interest expense (17,272) (12,754) (54,166) (46,230)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and cumulative effect (161,840) 632 (141,088) 38,939
Provision for income taxes
(Note 5) (23,825) (253) (31,275) (15,553)
---------- ---------- ---------- ----------
Income (loss) before cumulative
effect (185,665) 379 (172,363) 23,386
Cumulative effect on prior years of
change in accounting principle-
Postemployment benefits - - (4,950) -
---------- ---------- ---------- ----------
Net income (loss) (185,665) 379 (177,313) 23,386
Retained earnings at
beginning of period 522,243 563,515 529,179 555,796
Cash dividends (7,644) (7,644) (22,932) (22,932)
---------- ---------- ---------- ----------
Retained earnings at
end of period $ 328,934 $556,250 $ 328,934 $556,250
========== ========== ========== ==========
Earnings (loss) per share:
Income (loss) before
cumulative effect $ (4.86) $ .01 $ (4.51) $ .61
Cumulative effect on prior years of
change in accounting principle-
Postemployment benefits - - (.13) -
---------- ---------- ---------- ----------
Net income (loss) $ (4.86) .01 $ (4.64) $ .61
========== ========== ========== ==========
Cash dividends $ .20 $ .20 $ .60 $ .60
========== ========== ========== ==========
Weighted average number of
shares outstanding 38,220,000 38,220,000 38,220,000 38,220,000
========== ========== ========== ==========
See Notes to Quarterly Report on Pages 5 and 6.
-1-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
December 3, 1994 February 26, 1994
------------------ ------------------
(Unaudited)
ASSETS
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Current assets:
Cash and short-term investments $ 128,732 $ 124,236
Accounts receivable 213,254 190,954
Inventories 908,734 850,077
Prepaid expenses and other assets 56,769 65,072
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Total current assets 1,307,489 1,230,339
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Property:
Property owned 1,469,159 1,564,745
Property leased 111,413 122,788
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Property-net 1,580,572 1,687,533
Other assets 126,867 180,823
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Total Assets $3,014,928 $3,098,695
========== ==========
See Notes to Quarterly Report on Pages 5 and 6.
-2-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
December 3, 1994 February 26, 1994
------------------ ------------------
(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Current liabilities:
Current portion of long-term debt $ 54,471 $ 77,755
Current portion of obligations under
capital leases 14,932 16,097
Accounts payable 481,213 458,875
Book overdrafts 251,885 196,818
Accrued salaries, wages and benefits 168,642 173,366
Accrued taxes 38,325 35,879
Other accruals 177,676 192,342
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Total current liabilities 1,187,144 1,151,132
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Long-term debt 635,884 544,399
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Obligations under capital leases 150,705 162,866
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Deferred income taxes 123,178 100,405
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Other non-current liabilities 148,073 145,476
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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--38,229,490 shares 38,229 38,229
Capital surplus 453,475 453,475
Cumulative translation adjustment (Note 5) (50,331) (26,103)
Retained earnings 328,934 529,179
Treasury stock, at cost, 9,157 shares (363) (363)
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Total shareholders' equity 769,944 994,417
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Total liabilities and shareholders'
equity $3,014,928 $3,098,695
========== ==========
See Notes to Quarterly Report on Pages 5 and 6.
-3-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
40 Weeks Ended
December 3, December 4,
1994 1993
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(177,313) $ 23,386
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Cumulative effect on prior years of change
in accounting principle:
Postemployment benefits 4,950 -
Write-off of goodwill and long-lived assets 127,000 -
Depreciation and amortization 185,604 180,948
Increase (decrease) in deferred income taxes 22,614 (5,187)
(Gain) loss on disposal of owned property (1,305) 82
Increase in receivables (22,587) (7,649)
Increase in inventories (60,835) (16,382)
Increase in other current assets (8,614) (10,590)
Increase (decrease)in accounts payable 22,432 (9,610)
Decrease in accrued salaries,
wages and benefits (3,747) (167)
Increase in accrued taxes 2,085 24,472
Increase (decrease) in store closing reserves 5,027 (34,929)
Decrease in other accruals (32,376) (11,270)
Other 8,226 (2,058)
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Net cash provided by operating activities 71,161 131,046
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (163,745) (201,741)
Proceeds from disposal of property 7,673 13,278
Acquisition of business, net of
cash acquired - (42,948)
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Net cash used in investing activities (156,072) (231,411)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 75,666 140,103
Payment of long-term debt (6,650) (5,132)
Increase in book overdrafts 55,921 22,752
Principal payments on capital leases (12,140) (13,630)
Cash dividends (22,932) (22,932)
Purchase of treasury stock - (2)
--------- ---------
Net cash provided by financing
activities 89,865 121,159
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Effect of exchange rate changes on
cash and short-term investments (458) (1,582)
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NET INCREASE IN CASH AND
SHORT-TERM INVESTMENTS 4,496 19,212
Cash and Short-Term Investments
at Beginning of Period 124,236 110,120
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CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 128,732 $ 129,332
========= =========
See Notes to Quarterly Report on Pages 5 and 6.
-4-
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO QUARTERLY REPORT
-------------------------
1) BASIS OF PRESENTATION
The consolidated financial statements for the 40 weeks ended December 3,
1994 and December 4, 1993 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 cumulative effect adjustment
associated with the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 112 "Employers' Accounting for Postemployment
Benefits" (Note 2), the write-off of goodwill and long-lived assets
(Note 3), the provision for employee buy-out costs (Note 4) and the
valuation allowance recorded for deferred tax assets (Note 5). 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 1993 Annual Report on Form 10-K.
Certain reclassifications have been made to the prior interim periods'
financial statements in order to conform to the current period
presentation.
2) ACCOUNTING CHANGE
Effective February 27, 1994, the Company adopted SFAS No. 112 "Employers'
Accounting for Postemployment Benefits". SFAS No. 112 requires the
accrual of costs for preretirement, postemployment benefits provided to
former or inactive employees and the recognition of an obligation for
these benefits.
The Company's previous accounting policy had been to accrue for workers'
compensation and a principal portion of long-term disability benefits and
to expense other postemployment benefits, such as short-term disability,
as incurred. As a result, the Company recorded a charge of $5.0 million,
net of applicable income taxes of $3.9 million, as the cumulative effect
of recording the obligation as of the beginning of the year. The effect
of adopting the Statement will have an immaterial effect on the financial
results before the cumulative effect of accounting change for the fiscal
year.
3) WRITE-OFF OF GOODWILL AND LONG-LIVED ASSETS
During the third quarter of fiscal 1994, the Company recorded a non-cash
charge of $127 million reflecting $50 million for the write-off of
goodwill related to the acquisition of Miracle Food Mart ("Miracle")
stores in Canada and $77 million for the write-down of certain Miracle
fixed assets. Miracle experienced a work stoppage for a 14-week period
at the end of fiscal 1993. Under Canadian labor laws the stores were
closed during this time period. The labor dispute was settled and the
stores reopened for business on February 25, 1994. The Company
anticipated that the new labor agreement would have a positive impact on
-5-
operating results assuming historical sales levels could be attained.
Through the first half of fiscal 1994, the Company expended significant
promotional efforts in order to regain its pre-strike sales levels. The
sales performance through the first half of fiscal 1994 was disappointing
and the Company continued to monitor Miracle's performance through the
third quarter. Sales performance in the third quarter continued to be
negative when compared to pre-strike sales levels. The Company no longer
believes that Miracle's negative operating performance is temporary and
accordingly, revised its future expected cash flow projections. These
revised projections indicated that the goodwill balance would not be
recoverable over its remaining life. Further, these projections
indicated that the operating results of Miracle would not be sufficient
to absorb the depreciation and amortization of certain of its operating
fixed assets. Accordingly, Miracle's goodwill balance was written-off
and fixed assets relating to Miracle stores which are expected to
continue to generate operating losses were written-down as of the end of
the third quarter of fiscal 1994.
4) STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
Included in "Store operating, general and administrative expense" in the
third quarter of fiscal 1994 is a charge of $25 million to cover the cost
of Canadian employee buy-outs which have been and are currently being
offered to certain employees in conjunction with the Company's decision
to convert a significant number of its Ontario-based stores to a low-cost
format. In addition, the Company recorded a charge of $17 million to
cover the cost of closing 13 non-Miracle stores during fiscal 1995.
5) INCOME TAXES
During the third quarter of fiscal 1994, the Company recorded a reduction
of its net deferred tax assets of approximately $16 million. Such amount
was comprised of a $43 million charge to provide a valuation allowance
against previously recorded Canadian deferred tax assets for which, based
on current available evidence, it is more likely than not that such
deferred tax asset will not be realized. Offsetting this charge was the
reversal of a previously recorded liability in the amount of $27 million
representing the taxes associated with the undistributed earnings of its
Canadian operations as a result of the Company's election to permanently
reinvest these prior years earnings. Further, this decision resulted in
a direct charge to equity of approximately $20 million to eliminate the
deferred tax asset related to the Cumulative Translation Adjustment.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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MANAGEMENT'S DISCUSSION AND ANALYSIS
12 WEEKS ENDED DECEMBER 3, 1994
-------------------------------
OPERATING RESULTS
Sales for the third quarter ended December 3, 1994 of $2.3 billion increased
$3 million or 0.1% from last year. A lower Canadian exchange rate adversely
affected sales by $11 million or 0.5%. A labor strike in Canada's Miracle
Food Mart ("Miracle") stores last year caused the stores to be closed for
over two weeks of the third quarter of fiscal 1993, resulting in a current
quarter sales increase of 0.9%. Excluding the effect of the change in
exchange rates and adjusting for the fact that the Miracle stores were
closed for two weeks of the third quarter of fiscal 1993 due to the Miracle
strike, third quarter sales decreased 0.3%. Contributing to this decrease
was the closing of 77 stores during the first three quarters of fiscal 1994.
The closure of stores since the beginning of fiscal 1993 reduced comparative
third quarter sales by 3.7%. The Company opened 15 new stores during the
first three quarters of fiscal 1994. New store openings since the beginning
of fiscal 1993 added approximately 2.9% to sales for the third quarter of
fiscal 1994. Same store sales for the third quarter were 0.1% behind prior
year. Average weekly sales per store were approximately $174,700 versus
$164,400 for the corresponding period of the prior year for a 6.3% increase.
Third quarter sales for U.S. operations have improved, with same store sales
up 1.7% and comparable store sales, which include replacement stores, up
2.1% over the prior year. After adjusting for the fact that the Miracle
stores were closed for two weeks of the third quarter of fiscal 1993 due to
the Miracle strike, Canadian same store sales declined 7.5%, largely
reflecting the continued impact on sales of the Miracle stores since the
settlement of the 14-week labor strike in 63 Miracle stores which ended
February 25, 1994.
Gross margin as a percent of sales increased 0.2% to 28.6% in the third
quarter of 1994 from 28.4% for the third quarter of the prior year resulting
primarily from increased margins in the U.S. offset by decreased margins in
Canada. The gross margin dollar increase of $5 million is a result of an
increase in volume of $4 million and an increase in gross margin rates of $3
million offset by a lower Canadian exchange rate of $2 million. The U.S.
gross margin increased $16 million principally as a result of an increase in
gross margin rates of $9 million and increased volume of $7 million. In
Canada, gross margin declined $11 million, consisting of a decrease in gross
margin rates of $6 million, volume declines of $3 million and the exchange
rate decline of $2 million.
Store operating, general and administrative expense for the third quarter of
fiscal 1994 includes a charge of $25 million for employee buy-out costs
incurred as a result of new labor agreements entered into in Canada which
allow union employees the option of participating in a
termination/reassignment program. In addition, the Company plans to close
13 non-Miracle stores in Canada during fiscal 1995 and has recorded a third
quarter charge of $17 million to cover the cost of these closings.
Excluding the charges for Canadian employee buy-out costs and store
closings, store operating, general and administrative expense as a percent
of sales decreased to 27.5% from 27.8% for the corresponding period in the
prior year resulting primarily from reduced labor and advertising costs in
both the U.S. and Canada.
-7-
During the third quarter of fiscal 1994 the Company recorded a charge of
$127 million representing the write-off of $50 million of goodwill and the
write-down of $77 million of fixed assets relating to Miracle stores which
will continue to generate operating losses.
In November of 1993, the Miracle stores went on strike for a 14-week period.
When the Miracle strike ended in late February 1994, Management determined
at that time that the goodwill balance associated with Miracle stores would
be recoverable over its remaining life. This conclusion was based upon
projections which comprehended (i) the historical performance and market
shares of the Miracle stores in pre-strike periods, (ii) the labor savings
projected to be realized as a result of the favorable terms of the
settlement (principally wage and benefit concessions and the ability to use
newly hired part-time employees after a certain level of full and part-time
union employment has been realized), and (iii) the regaining of pre-strike
sales and operating margins which was anticipated to occur because of the
implementation of extensive promotional programs in the Miracle stores. The
Company's operating projections for the post-strike period indicated that
Miracle would generate income from operations and would be able to recover
the amortization of the goodwill balance over its remaining life. Since the
Canadian labor laws preclude the replacement of striking workers, the strike
resulted in a complete shutdown of all of the Miracle stores. The strike
was resolved on February 20, 1994 and the Company paid $17 million in labor
settlement costs. These stores were reopened for business commencing
February 25, 1994. Following the strike, Management instituted extensive
and costly promotional campaigns designed to assist in its goal of
reestablishing pre-strike sales levels.
Management continued to assess the performance of the Miracle stores during
the post-strike period. The anticipated recovery of Miracle sales and
operating margins was not yet realized through June 18, 1994, the end of the
Company's first fiscal quarter or September 10, 1994, the end of the
Company's second fiscal quarter. Through the second quarter same store
sales and margins had declined significantly when compared to the prior year
pre-strike levels. At that time, Management concluded that the following
factors were the principal reasons why the recovery had not yet been
realized: (i) increased price competition from Miracle competitors in
response to the promotional activities implemented by Miracle, (ii) the
inability to yet utilize part-time employees (a key element of the strike
settlement which required increased sales levels to be effective) and (iii)
the continuing effects of the complete shutdown during the strike.
Management continued to believe that these negative trends were temporary
and that more time was required to determine the effectiveness of the
promotional programs and the changed competitive environment. Management
continued to closely monitor the operating performance and sales levels
during the third quarter.
Despite the extensive promotional programs, in the period through December
3, 1994, the operating performance of Miracle did not improve and the
negative sales trends and deteriorating margin levels continued. Management
believed that the negative results which have occurred subsequent to the
strike were no longer temporary and, accordingly, prior operating cash flow
projections of Miracle were revised. These revised projections indicated
that the Miracle goodwill balance would not be recovered over its remaining
life and the full amount thereof should be written-off.
-8-
Further, the levels of sales and operating cash flow achieved through the
first nine months of the current fiscal year, coupled with the reduced
expectations of future Miracle operations, indicated that Miracle's
operating results would not be sufficient to absorb the depreciation and
amortization of certain of its operating fixed assets. In order to measure
this impairment, the Company analyzed the projected operating performance of
each store comprising the Miracle division and reflected the impairment of
the fixed assets attributable to those stores which the Company now believes
will continue to generate an operating loss before taking into account
depreciation and amortization expenses. The Company has no current plans to
close Miracle stores in spite of their negative performance and believes
that the total Canadian operations will be able to absorb their projected
fixed costs. The Company also believes that the fixed assets related to the
Canadian operations exclusive of Miracle are recoverable from operations
over their remaining useful lives.
Based on current information, the Company has no reasonable basis to believe
that any existing goodwill on the books of the Company is required to be
written off. After giving effect to the Miracle goodwill write-off, there
is currently no goodwill recorded on the books of the Canadian operations.
Interest expense increased from the previous year primarily due to increased
U.S. borrowings of $100 million in long-term Notes and an increase in
interest rates on short-term borrowings partly offset by a decrease in the
interest rate on long-term Notes.
Excluding the charge for the write-off of goodwill and long-lived assets of
$127 million, the employee buy-out provision of $25 million and the
provision for store closings of $17 million, income before taxes for the
third quarter ended December 3, 1994 is $7.2 million compared to $0.6
million for the comparable period in the prior year. Income before taxes
for U.S operations for the third quarter of fiscal 1994 increased 64% over
the same period of the prior year.
The income tax provision recorded in the third quarter of fiscal 1994
includes a charge of $43 million for the establishment of a valuation
allowance to offset previously recorded Canadian deferred tax benefits
resulting from loss carryforwards for which, based on current available
evidence, it is more likely than not that such deferred tax asset will not
be realized. Offsetting this charge was the reversal of $27 million
representing the taxes associated with the undistributed earnings of its
Canadian operations as a result of the Company's election to permanently
reinvest these prior years earnings. Further, this decision also resulted
in a direct charge to equity to eliminate the deferred tax asset of
approximately $20 million related to the Cumulative Translation Adjustment.
In addition, third quarter fiscal 1994 results were further affected by the
Company's decision to no longer record income tax benefits on current
Canadian losses.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS
40 WEEKS ENDED DECEMBER 3, 1994
-------------------------------------
OPERATING RESULTS
Sales for the 40 weeks ended December 3, 1994 of $8.0 billion decreased $60
million or 0.7% from last year. A lower Canadian exchange rate adversely
affected sales by $88 million or 1.1%. In addition, a competitors' strike
in the New York metropolitan market last year resulted in an estimated
current year comparable sales decline of 0.4%. A labor strike in Canada's
Miracle stores last year caused the stores to be closed for over two weeks
of the third quarter of fiscal 1993, resulting in an estimated current year
sales increase of 0.3%. Excluding the effects of the change in exchange
rates and the effects of last year's competitors' strike and adjusting for
the fact that the Miracle stores were closed for two weeks of the third
quarter of fiscal 1993 due to the Miracle strike, sales increased 0.5%. The
Company opened 15 new stores and closed 77 stores during the 40 weeks ended
December 3, 1994. New store openings since the beginning of fiscal 1993 and
the acquisition of Big Star stores in the prior year first quarter added
approximately 3.2% to sales in the first three quarters of fiscal 1994. The
closure of stores since the beginning of fiscal 1993 reduced comparative
sales by approximately 3.0%. Same store sales for the first 40 weeks of
fiscal 1994 increased 0.1% over prior year. Average weekly sales per store
were approximately $174,000 versus $166,100 for the same period of the prior
year for a 4.8% increase.
Same store sales for U.S. operations were 1.7% ahead of prior year and
comparable store sales, which include replacement stores, were up 2.4% after
excluding the effect of last year's competitors' strike. After adjusting
for the fact that the Miracle stores were closed for two weeks of the third
quarter of fiscal 1993 due to the Miracle strike, Canadian same store sales
were down 6.6% mainly due to the slow recovery of sales for the Miracle
stores since the settlement of the Canadian labor strike on the last day of
fiscal 1993.
Gross margin as a percent of sales decreased 0.2% to 28.4% for the current
year from 28.6% for the prior year resulting primarily from increased
special price reductions in the U.S. and decreased margins in Canada partly
offset by increased buying allowances in the U.S.. The gross margin dollar
decrease of $33 million is a result of the decline in the Canadian exchange
rate of $22 million and a decrease in gross margin rates of $19 million,
principally Canadian, partly offset by an increase in volume of $8 million,
principally U.S.. The U.S. gross margin increased $51 million of which $32
million is attributable to volume increases. In Canada, gross margin
decreased $84 million, consisting of a decrease in gross margin rates of $37
million, a volume decline of $25 million and the exchange rate decline of
$22 million.
Store operating, general and administrative expense for the 40 weeks ended
December 3, 1994 includes a charge of $25 million for employee buy-out costs
incurred as a result of new labor agreements entered into in Canada which
allow union employees the option of participating in a
termination/reassignment program. In addition, the Company plans to close
13 non-Miracle stores in Canada during fiscal 1995 and has recorded a third
quarter charge of $17 million to cover the cost of these closings.
Excluding the charges for Canadian employee buy-out costs and store
closings, store operating, general and administrative expense as a percent
of sales decreased to 27.4% from 27.6% for the prior year primarily
resulting from decreased store labor partly offset by increased store
occupancy costs.
-10-
As discussed in detail on pages 8 and 9, the Company recorded a charge in
the third quarter of fiscal 1994 of $127 million representing the write-off
of $50 million of goodwill and the write down of $77 million of fixed assets
relating to Miracle stores which will continue to generate operating losses.
Interest expense increased from the previous year mainly as a result of
increased U.S. borrowings of $100 million in Long-term Notes and an increase
in interest rates on short-term borrowings partly offset by a decrease in
the interest rate on Long-term Notes.
Excluding the charge for the write-off of goodwill and long-lived assets of
$127 million, the employee buy-out provision of $25 million and the
provision for store closings of $17 million, income before taxes and
cumulative effect for the 40 weeks ended December 3, 1994 is $27.9 million
compared to $38.9 million for the same period of the prior year. Income
before taxes for U.S. operations for the 40 weeks ended December 3, 1994
increased 25% over the same period of the prior year.
The income tax provision for the 40 weeks ended December 3, 1994 includes a
charge of $43 million for the establishment of a valuation allowance to
offset previously recorded Canadian deferred tax benefits resulting from
loss carryforwards for which, based on current available evidence, it is
more likely than not that such deferred tax asset will not be realized.
Offsetting this charge was the reversal of $27 million representing the
taxes associated with the undistributed earnings of its Canadian operations
as a result of the Company's election to permanently reinvest these prior
years earnings. Further, this decision also resulted in a direct charge to
equity to eliminate the deferred tax asset of approximately $20 million
related to the Cumulative Translation Adjustment. In addition, third
quarter fiscal 1994 results were further affected by the Company's decision
to no longer record income tax benefits on current Canadian losses.
Effective February 27, 1994, the Company adopted SFAS No. 112 "Employers'
Accounting for Postemployment Benefits". As a result, the Company recorded
a charge of $5.0 million or $0.13 per share (net of tax) as the cumulative
effect of this change on prior years.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the third quarter with working capital of $120 million
compared to $79 million at the beginning of the fiscal year. The Company
had cash and short-term investments aggregating $129 million at the end of
the third quarter of fiscal 1994 compared to $124 million at the end of
fiscal 1993.
As a result of the charges previously discussed, certain financial covenants
in the Company's U.S. and Canadian bank credit agreements were required to
be amended. The Company has obtained the necessary waivers for these
facilities through January 31, 1995 and is near completion in finalizing the
required amendments. The U.S. amendments, which have been approved by the
required banks, will become effective upon the final documentation of the
Company's CAN$200 Million Canadian Loan Facility, the principal terms of
which have been agreed to. The amendments provide for certain financial
covenants which require, among other things, minimum net worth and levels of
indebtedness.
Subsequent to the third quarter ended December 3, 1994, the Company has
reduced its regular quarterly dividend to five cents per share from 20 cents
per share.
-11-
For fiscal 1994, the Company had planned capital expenditures of
approximately $340 million for 35 new stores and approximately 120 remodels
and expansions. Certain store openings and remodels and expansions have
been delayed mainly to permit compliance with applicable regulatory
requirements. Accordingly, the Company has adjusted its planned 1994
capital expenditures to approximately $210 million including 18 new stores
and approximately 57 remodels and expansions. For the 40 weeks ended
December 3, 1994, capital expenditures totaled $164 million, which included
15 new stores and 44 remodels and enlargements.
At the end of the third quarter of fiscal 1994, the Company's existing
senior debt rating was BBB- with Standard & Poor's Ratings Group and Baa3
with Moody's Investors Service. A change in either of these ratings could
affect the availability and cost of financing.
The Company's 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 1994.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
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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
--------------------------------
None
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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, 1995 By: /s/ Kenneth A. Uhl
---------------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)
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