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 15, 1996 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 15, 1996 ----- ---------------------------- 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 amounts) (Unaudited) 16 Weeks Ended June 15, June 17, 1996 1995 ---------- ---------- Sales $3,092,554 $3,135,514 Cost of merchandise sold (2,195,774) (2,225,702) ---------- ---------- Gross margin 896,780 909,812 Store operating, general and administrative expense (844,037) (862,928) ---------- ---------- Income from operations 52,743 46,884 Interest expense, net (20,771) (22,346) ---------- ---------- Income before income taxes 31,972 24,538 Provision for income taxes (10,093) (9,988) ---------- ---------- Net income 21,879 14,550 Retained earnings at beginning of period 382,380 332,800 Cash dividends (1,911) (1,911) ---------- ---------- Retained earnings at end of period $ 402,348 $ 345,439 ========== ========== Earnings per share: Net income $ .57 $ .38 ========== ========== Cash dividends $ .05 $ .05 ========== ========== Weighted average number of common and common equivalent shares outstanding 38,295,144 38,220,333 ========== ========== See Notes to Quarterly Report on Page 5. - 1 - THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. CONSOLIDATED BALANCE SHEETS --------------------------- (Dollars in thousands) June 15, 1996 Feb. 24, 1996 ------------- ------------- (Unaudited) ASSETS - ------ Current assets: Cash and short-term investments $ 123,400 $ 99,772 Accounts receivable 193,797 205,133 Inventories 846,164 826,510 Prepaid expenses and other assets 48,914 43,520 ---------- ---------- Total current assets 1,212,275 1,174,935 ---------- ---------- Property: Property owned 1,478,239 1,461,165 Property leased 90,341 93,379 ---------- ---------- Property-net 1,568,580 1,554,544 Other assets 143,220 131,368 ---------- ---------- Total Assets $2,924,075 $2,860,847 ========== ========== See Notes to Quarterly Report on Page 5. -2- THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. CONSOLIDATED BALANCE SHEETS --------------------------- (Dollars in thousands) June 15, 1996 Feb. 24, 1996 -------------- ------------- (Unaudited) LIABILITIES & SHAREHOLDERS' EQUITY - ---------------------------------- Current liabilities: Current portion of long-term debt $ 4,548 $ 13,040 Current portion of obligations under capital leases 13,018 13,125 Accounts payable 495,257 452,257 Book overdrafts 161,511 157,022 Accrued salaries, wages and benefits 125,481 127,133 Accrued taxes 62,732 59,407 Other accruals 161,416 161,984 ---------- ---------- Total current liabilities 1,023,963 983,968 ---------- ---------- Long-term debt 653,430 650,169 ---------- ---------- Obligations under capital leases 126,479 129,887 ---------- ---------- Deferred income taxes 125,562 120,904 ---------- ---------- Other non-current liabilities 151,308 153,134 ---------- ---------- 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 (50,356) (50,936) Retained earnings 402,348 382,380 Treasury stock, at cost, 9,157 shares (363) (363) ---------- ---------- Total shareholders' equity 843,333 822,785 ---------- ---------- Total liabilities and shareholders' equity $2,924,075 $2,860,847 ========== ========== 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 15, 1996 June 17, 1995 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 21,879 $ 14,550 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 69,558 70,400 Deferred income tax provision 5,989 10,905 (Gain) loss on disposal of owned property 52 (441) Decrease in receivables 11,610 16,952 (Increase) decrease in inventories (18,579) 9,317 Increase in prepaid expenses and other current assets (7,417) (9,643) Increase in accounts payable 42,402 39,369 Decrease in accrued salaries, wages and benefits (1,873) (8,050) Increase in accrued taxes 4,156 1,917 Decrease in store closing reserves (5,099) (405) Increase in other accruals and other liabilities 2,241 4,971 Other (8,837) (4,636) --------- --------- Net cash provided by operating activities 116,082 145,206 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property (93,233) (67,737) Proceeds from disposal of property 8,815 19,255 --------- --------- Net cash used in investing activities (84,418) (48,482) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in short-term debt 10,577 992 Proceeds under revolving lines of credit and long-term borrowings 6,646 56,915 Payments on revolving lines of credit and long-term borrowings (23,575) (155,774) Increase in book overdrafts 4,117 1,097 Principal payments on capital leases (4,034) (4,367) Cash dividends (1,911) (1,911) --------- --------- Net cash used in financing activities (8,180) (103,048) --------- --------- Effect of exchange rate changes on cash and short-term investments 144 179 --------- --------- NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 23,628 (6,145) Cash and Short-Term Investments at Beginning of Period 99,772 128,930 --------- --------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $123,400 $ 122,785 ========= ========= 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 weeks ended June 15, 1996 and June 17, 1995 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 1995 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 1996 and 1995 reflect the Company's estimated expected annual tax rates applied to their respective domestic and foreign financial results. The first quarter 1996 and 1995 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 valuation allowance. As of June 15, 1996, a valuation allowance existed for the entire amount of the net deferred tax assets relating to the Canadian operations. During the first quarter of fiscal 1996 the Canadian operations generated pretax earnings and reversed a portion of the valuation allowance. Although Canada generated pretax earnings, the Company was unable to conclude that the Canadian deferred tax assets was more likely than not to be realized due to the pretax losses experienced by Canada in fiscal years 1992 through 1994. 3) OTHER ASSETS Other assets include notes receivable and equipment leases relating to Food Basics franchising. 4) NEW ACCOUNTING STANDARD Effective February 25, 1996 the Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company will continue to apply the methods prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" with proforma disclosure of net income and earnings per share as if the fair value based method of SFAS 123 had been applied. -5- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS 16 WEEKS ENDED JUNE 15, 1996 --------------------------------- OPERATING RESULTS Sales for the first quarter ended June 15, 1996 of $3.1 billion decreased $43 million or 1.4% from the prior year first quarter. Contributing to this decrease is the Company's continuing program to eliminate obsolete, unproductive stores, and the consequent closing of 34 stores during the first quarter of fiscal 1996, which includes 5 replacement stores. Of the 34 store closings, 6 have already re-opened as Food Basics Franchise stores in Canada and 6 are scheduled to re-open later in the year as Food Basics Franchise stores. The closure of 141 stores since the beginning of fiscal 1995, of which 24 have been converted to Food Basics Franchise stores in Canada and 6 which will be converted to Food Basics Franchise stores later in the year, and 8 which were sold in the Rhode Island market, reduced comparative sales by approximately $165 million or 5.3%. The opening of 25 stores in new market areas since the beginning of fiscal 1995 added approximately $96 million or 3.1% to sales in the first quarter of fiscal 1996. As of June 15, 1996, the Company serviced 24 Food Basics Franchise stores to which the Company had wholesale sales of $34 million. Same store sales for the first quarter, including replacement stores, decreased 0.4% from the prior year. Average weekly sales per store were approximately $187,600 versus $176,300 for the corresponding period of the prior year for a 6.4% increase. Same store sales for U.S. operations, which include replacement stores, declined 0.5% from the prior year as the Company continued its new store development program in the U.S. In Canada, same store sales, which include replacement stores, increased 0.2% from the prior year. Gross margin as a percent of sales decreased .02% to 29.00% in the first quarter of fiscal 1996 from 29.02% for the first quarter of fiscal 1995, resulting primarily from decreased gross margin rates in Canada and increased promotional price reductions in the U.S. The gross margin dollar decrease of $13 million is primarily the result of a decrease in sales volume which had an impact of decreasing margin by $24 million, partially offset by an increase in gross margin rates of $11 million. In Canada, gross margin decreased $13 million, primarily resulting from the effect of a decrease in sales volume which had an impact of decreasing margin by $12 million and a decrease in gross margin rates of $1 million. The U.S. gross margin remained flat with volume declines which impacted margins by $12 million being offset by an increase in gross margin rates of $12 million. Store operating, general, and administrative expense as a percent of sales decreased to 27.3% from 27.5% for the corresponding period in the prior year resulting primarily from reduced advertising costs in both the U.S. and Canada and reduced store labor costs and occupancy costs in Canada. Interest expense decreased $1.6 million from the previous year, primarily due to decreased average borrowings and a decrease in average interest rates in both the U.S. and Canada. -6- Income before income taxes for the first quarter ended June 15, 1996 was $32 million compared to $24.5 million for the comparable period in the prior year for an increase of approximately $7.5 million or 30%. The increase is mainly the result of lower store operating, general and administrative expenses of $18.9 million, and lower interest expense of $1.6 million, partially offset by lower gross margin of $13 million. The income tax provisions recorded in the first quarter of fiscal years 1996 and 1995 reflects the Company's estimated expected annual tax rates applied to their respective domestic and foreign financial results. The first quarter 1996 and 1995 provisions mainly reflect the taxes on U.S. income, as the Canadian income tax expense is principally offset by the reversal of its income tax valuation allowance. As of June 15, 1996, the Company is continuing to fully reserve for all Canadian deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES The Company ended the first quarter with working capital of $188 million compared to $191 million at the beginning of the fiscal year. The Company had cash and short-term investments aggregating $123 million at the end of the first quarter of fiscal 1996 compared to $100 million at the end of fiscal 1995. The Company has a U.S. $400 million and a Canadian $75 million unsecured, five year revolving credit agreement which expires in December, 2000. In addition, the Company also has various uncommitted lines of credit with numerous banks. As of June 15, 1996, the Company had approximately $378 million available in credit facilities of which $370 million were committed facilities. The Company's loan agreements and certain of its notes contain various financial covenants which require among other things, minimum net worth and maximum levels of indebtedness and lease commitments. The Company was in compliance with all such covenants as of June 15, 1996. For the 16 weeks ended June 15, 1996, capital expenditures totaled $93 million, which included 13 new stores and 21 remodels and enlargements. The Company expects to have capital expenditures of approximately $217 million throughout the remainder of fiscal 1996. 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 1996. -7- 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 9, 1996, there were 35,692,568 shares, or 93.4% of the 38,220,333 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 99.2% of the shares present. Deloitte & Touche LLP was re- elected as the Company's independent auditor by at least 99.8% of the shares present. A shareholder proposal on a non-employee director retirement plan was rejected, with 5,421,129 votes representing 16.2% of the shares voting in favor of the proposal and 27,959,364 shares voting against. A second shareholder proposal, on director compensation, was rejected, with 1,372,480 shares representing 4.1% voting in favor of the proposal and 31,999,000 shares voting against. Item 5. Other Information ----------------- None Item 6. Exhibits and Reports on Form 8-K -------------------------------- None -8- 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 29, 1996 By: /s/ Kenneth A. Uhl --------------------------------------- Kenneth A. Uhl, Vice President and Controller (Chief Accounting Officer) -9-