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 14, 1997 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 14, 1997 ----- ---------------------------- Common stock - $1 par value 38,248,966 shares THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STATEMENTS OF CONSOLIDATED OPERATIONS & RETAINED EARNINGS (Dollars in thousands, except share amounts) (Unaudited) 16 Weeks Ended June 14, June 15, 1997 1996 ---------- ---------- Sales $3,104,591 $3,092,554 Cost of merchandise sold (2,220,375) (2,195,774) ---------- ---------- Gross margin 884,216 896,780 Store operating, general and administrative expense (831,210) (844,037) ---------- ---------- Income from operations 53,006 52,743 Interest expense, net (22,153) (20,771) ---------- ---------- Income before income taxes 30,853 31,972 Provision for income taxes (8,066) (10,093) ---------- ---------- Net income 22,787 21,879 Retained earnings at beginning of period 447,768 382,380 Cash dividends (3,825) (1,911) ---------- ---------- Retained earnings at end of period $ 466,730 $ 402,348 ========== ========== Earnings per share: Net income $ .60 $ .57 ========== ========== Cash dividends $ .10 $ .05 ========== ========== Weighted average number of common and common equivalent shares outstanding 38,252,722 38,295,144 ========== ========== See Notes to Quarterly Report on Page 5. - 1 - THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. CONSOLIDATED BALANCE SHEETS --------------------------- (Dollars in thousands) June 14, 1997 Feb. 22, 1997 ------------- ------------- (Unaudited) ASSETS - ------ Current assets: Cash and short-term investments $ 173,894 $ 98,830 Accounts receivable 225,611 213,888 Inventories 899,008 881,288 Prepaid expenses and other assets 45,462 37,373 ---------- ---------- Total current assets 1,343,975 1,231,379 ---------- ---------- Property: Property owned 1,496,599 1,486,504 Property leased 99,782 103,474 ---------- ---------- Property-net 1,596,381 1,589,978 Other assets 174,515 181,315 ---------- ---------- Total Assets $3,114,871 $3,002,672 ========== ========== See Notes to Quarterly Report on Page 5. -2- THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. CONSOLIDATED BALANCE SHEETS --------------------------- (Dollars in thousands) June 14, 1997 Feb. 22, 1997 -------------- ------------- (Unaudited) LIABILITIES & SHAREHOLDERS' EQUITY - ---------------------------------- Current liabilities: Current portion of long-term debt $ 8,690 $ 18,290 Current portion of obligations under capital leases 12,706 12,708 Accounts payable 494,361 468,808 Book overdrafts 152,103 182,305 Accrued salaries, wages and benefits 143,073 146,737 Accrued taxes 61,561 52,269 Other accruals 136,997 134,888 ---------- ---------- Total current liabilities 1,009,491 1,016,005 ---------- ---------- Long-term debt 804,020 701,609 ---------- ---------- Obligations under capital leases 133,369 137,886 ---------- ---------- Deferred income taxes 113,106 113,188 ---------- ---------- Other non-current liabilities 146,449 143,912 ---------- ---------- Commitments & contingencies Shareholders' equity: Preferred stock--no par value; authorized--3,000,000 shares; issued--none - - Common stock--$1 par value; authorized-- 80,000,000 shares; issued and outstanding 38,248,966 and 38,247,716, respectively 38,249 38,247 Capital surplus 453,784 453,751 Cumulative translation adjustment (50,327) (49,694) Retained earnings 466,730 447,768 ---------- ---------- Total shareholders' equity 908,436 890,072 ---------- ---------- Total liabilities and shareholders' equity $3,114,871 $3,002,672 ========== ========== 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 14, 1997 June 15, 1996 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 22,787 $ 21,879 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 71,439 69,558 Deferred income tax provision 5,541 5,989 Loss on disposal of owned property 1,013 52 (Increase)decrease in receivables (6,272) 11,610 Increase in inventories (19,281) (18,579) Increase in prepaid expenses and other current assets (13,775) (7,417) (Increase) decrease in other assets 640 (8,936) Increase in accounts payable 26,460 42,402 Decrease in accrued salaries, wages and benefits (3,329) (1,873) Increase in accrued taxes 9,324 4,156 Increase (decrease)in other accruals and other liabilities 7,158 (2,858) Other operating activities, net 127 99 --------- --------- Net cash provided by operating activities 101,832 116,082 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property (83,221) (93,233) Proceeds from disposal of property 1,823 8,815 --------- --------- Net cash used in investing activities (81,398) (84,418) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in short-term debt (101,516) 10,577 Proceeds under revolving lines of credit and long-term borrowings 305,696 6,646 Payments on revolving lines of credit and long-term borrowings (109,714) (23,575) Increase(decrease)in book overdrafts (29,654) 4,117 Principal payments on capital leases (3,825) (4,034) Deferred financing fees (2,434) - Cash dividends (3,825) (1,911) Proceeds from stock options exercised 35 - --------- --------- Net cash provided by (used in) financing activities 54,763 (8,180) --------- --------- Effect of exchange rate changes on cash and short-term investments (133) 144 --------- --------- NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS 75,064 23,628 Cash and Short-Term Investments at Beginning of Period 98,830 99,772 --------- --------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 173,894 $ 123,400 ========= ========= 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 14, 1997 and June 15, 1996 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 1996 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 1997 and 1996 reflect the Company's estimated expected annual tax rates applied to their respective domestic and foreign financial results. The first quarter 1997 and 1996 income tax provisions mainly reflect the taxes on U.S. income, as the Canadian income tax expense is principally offset by the reversal of its deferred tax asset valuation allowance. During the first quarter of fiscal 1997 and 1996 the Canadian operations generated pretax earnings and reversed a portion of the valuation allowance to the extent of such pretax earnings. Although Canada generated pretax earnings, the Company was unable to conclude that the Canadian deferred tax assets are more likely than not to be realized. Accordingly, at June 14, 1997 the Company is continuing to fully reserve its Canadian net deferred tax assets. The valuation allowance will be adjusted when and if, in the opinion of Management, significant positive evidence exists which indicates that it is more likely than not that the Company will be able to realize its Canadian deferred tax assets. 3) OTHER ASSETS Other assets include notes receivable and equipment leases relating to the Food Basics franchising business amounting to approximately $38.7 million and $40.2 million at June 14, 1997 and February 22, 1997, respectively. 4) DEBT On April 15, 1997, the Company issued $300 million 7.75% 10 year Notes due April 15, 2007. The Company used the net proceeds to reduce bank borrowings under the U.S. and Canadian revolving credit facilities, prepay other indebtedness and for general corporate purposes. On June 12, 1997, the Company offered to exchange its 7.75% 10 year Notes due April 15, 2007, which were registered under the Securities Act, for outstanding 7.75% 10 year Notes due April 15, 2007, which had not been so registered. The exchange offer expired on July 10, 1997 with all outstanding unregistered 10 year Notes being exchanged for registered 10 year Notes. On June 10, 1997, the Company executed an unsecured five year $465 million U.S. credit agreement and a five year C$50 million Canadian credit agreement (the " 1997 Credit Agreement") with a syndicate of banks, enabling it to borrow funds on a revolving basis sufficient to refinance short-term borrowings. This 1997 Credit Agreement replaced a previous five year $400 million U.S. revolving credit agreement and a C$100 million revolving credit agreement dated December 12, 1995. The 1997 Credit Agreement resulted in the Company obtaining lower cost of borrowing, reduced facility fees, and extended the maturity to June 2002. The Company currently intends to borrow up to $200 million against the 1997 Credit Agreement in order to repay at maturity $200 million in bonds due on January 15, 1998. 5) NEW ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 " Earnings Per Share" ("SFAS 128"). SFAS 128 replaces the presentation of primary earnings per share ("EPS") with a presentation of basics EPS. The Company will adopt SFAS 128 during the fourth quarter of fiscal 1997 and believes that the computation of basics EPS will not result in a difference from primary EPS as currently computed. 6) SUBSEQUENT EVENT On June 23, 1997, the Company executed an agreement to sell 11 stores in North Carolina and South Carolina to a supermarket chain in the Southeast. This transaction is expected to close in the third quarter of fiscal 1997. -5- THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS 16 WEEKS ENDED JUNE 14, 1997 ---------------------------- OPERATING RESULTS Sales for the first quarter ended June 14, 1997 of $3.1 billion increased $12 million or 0.4% from the prior year first quarter. Contributing to this increase is the opening of 23 stores in new market areas since the beginning of fiscal 1996 which added approximately $73 million or 2.4% to sales in the first quarter of fiscal 1997. In addition, wholesale sales to the Food Basics franchised stores increased $65 million or 188% to $100 million for the 16 weeks ended June 14, 1997, which increased total Company sales by 2.1%. These increases were partially offset by store closures and same store sales. The closure of 74 stores, excluding replacement stores, since the beginning of fiscal 1996, reduced comparative sales by approximately $76 million or 2.5% in the first quarter of fiscal 1997. In addition, same store sales ("same store sales" referred to herein includes replacement stores) decreased 1.6% or $50 million from the same period last year. Average weekly sales per supermarket were approximately $197,000 versus $192,300 for the corresponding period of the prior year for a 2.4% increase. Same store sales for U.S. operations declined 1.7% from the prior year and for the Canadian operations same store sales decreased 1.1% from the prior year. Gross margin as a percent of sales decreased .52% to 28.48% in the first quarter of fiscal 1997 from 29.00% for the first quarter of fiscal 1996, resulting primarily from the impact of the increase in the lower margin wholesale sales to the Food Basics franchised stores. The wholesale sales to the franchised stores represented 3.2% of total Company sales in the first quarter of 1997 as opposed to only 1.1% of total Company sales in the prior year first quarter. Excluding the effect of the wholesale sales to the franchised stores, the gross margin percentage increased .06% from the prior year to 29.35%. The gross margin dollar decrease of $13 million is primarily the result of the increased wholesale sales which have a lower margin than the retail sales. The lower margin wholesale sales resulted in a decrease in gross margin rates of $16 million which was partially offset by the wholesales sales volume increase which impacted margins by $5 million. A lower Canadian exchange rate resulted in decreasing gross margin by $2 million. The Canadian operations gross margin decreased $10 million which was primarily the result of the wholesale sales increase from the prior year. The U.S. gross margin decreased $3 million principally as a result of a decrease in sales volume which had an impact of decreasing margin by $5 million. Store operating, general, and administrative expense as a percent of sales decreased .52% to 26.77% from 27.29% for the prior year resulting primarily from the Food Basics franchise business. The Food Basics franchise business maintained expenses relatively flat while sales increased $65 million. Interest expense, net increased $1.4 million from the previous year, primarily due to an increase in debt of approximately $93 million. The increase in interest expense was partially offset by an increase in interest income of $1.5 million from the prior year first quarter. This increase was the result of higher interest income on the equipment leases relating to the Food Basics franchise business and higher interest income on short-term investments. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------ Income before income taxes for the first quarter ended June 14, 1997 was $30.9 million compared to $32 million for the comparable period in the prior year for a decrease of approximately $1.1 million or 3.5%. The decrease is mainly the result of lower gross margin of $12.6 million and higher interest expense of $1.4 million, partially offset by lower store operating, general and administrative expenses of $12.9 million. The income tax provisions recorded in the first quarter of fiscal years 1997 and 1996 reflects the Company's estimated expected annual tax rates applied to their respective domestic and foreign financial results. The effective tax rate for the first quarter of fiscal 1997 was 26.1% versus an effective tax rate of 31.6% for the first quarter of fiscal 1996. The decrease in the effective tax rate is the result of the higher earnings provided by the Canadian operations. The first quarter 1997 and 1996 income tax provisions mainly reflect the taxes on U.S. income, as the Canadian income tax expense is principally offset by the reversal of its deferred tax asset valuation allowance. During the first quarter of fiscal 1997 and 1996 the Canadian operations generated pretax earnings and reversed a portion of the valuation allowance to the extent of such pretax earnings. Although Canada generated pretax earnings, the Company was unable to conclude that the Canadian deferred tax assets are more likely than not to be realized. Accordingly, at June 14, 1997 the Company is continuing to fully reserve its Canadian net deferred tax assets. The valuation allowance will be adjusted when and if, in the opinion of Management, significant positive evidence exists which indicates that it is more likely than not that the Company will be able to realize its Canadian deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES The Company ended the first quarter with working capital of $334 million compared to $215 million at the beginning of the fiscal year. The Company had cash and short-term investments aggregating $174 million at the end of the first quarter of fiscal 1997 compared to $99 million as of fiscal 1996 year end. Short-term investments were approximately $56 million and $0.1 million at June 14, 1997 and February 22, 1997, respectively, and were primarily invested in commercial paper. On April 15, 1997, the Company issued $300 million 7.75% 10 year Notes due April 15, 2007. The Company used the net proceeds to reduce bank borrowings under the U.S. and Canadian revolving credit facilities, prepay other indebtedness and for general corporate purposes. On June 12, 1997, the Company offered to exchange its 7.75% 10 year Notes due April 15, 2007, which were registered under the Securities Act, for outstanding 7.75% 10 year Notes due April 15, 2007, which had not been so registered. The exchange offer expired on July 10, 1997 with all outstanding unregistered 10 year Notes being exchanged for registered 10 year Notes. -8- On June 10, 1997, the Company executed an unsecured five year $465 million U.S. credit agreement and a five year C$50 million Canadian credit agreement (the "1997 Credit Agreement") with a syndicate of banks, enabling it to borrow funds on a revolving basis sufficient to refinance short-term borrowings. This 1997 Credit Agreement replaced a previous five year $400 million U.S. revolving credit agreement and a C$100 million revolving credit agreement dated December 12, 1995. The 1997 Credit Agreement resulted in the Company obtaining lower cost of borrowing, reduced facility fees, and extended the maturity to June 2002. In addition to the 1997 Credit Agreement, the Company also has various uncommitted lines of credit with numerous banks. As of June 14, 1997, the Company had no borrowings outstanding on the 1997 Credit Agreement or on the uncommitted lines of credit. Accordingly, as of June 14, 1997, the Company had available approximately $500 million on the 1997 Credit Agreement and various amounts in uncommitted lines of credit. The Company currently intends to borrow up to $200 million against the 1997 Credit Agreement in order to repay at maturity $200 million in bonds due on January 15, 1998. 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 14, 1997. On March 18, 1997, the Board of Directors increased the Company's quarterly dividend from $0.05 to $0.10 per share which increased the dividend payment from $1.9 million in the first quarter of fiscal 1996 to $3.8 million in the first quarter of fiscal 1997. On April 14, 1997, Standard & Poor's Ratings Group upgraded the Company's rating to BBB- from it's previous rating of BB+. This upgrade brought the Standard & Poor's rating in line with the Company's existing senior debt rating of Baa3 with Moody's Investor's Service. A further change in either of these ratings could affect the availability and cost of financing. For the 16 weeks ended June 14, 1997, capital expenditures totaled $83 million, which included 9 new stores and 20 remodels and enlargements. Currently, the Company expects to achieve its fiscal 1997 budgeted capital expenditures of approximately $310 million. Accordingly, the Company expects to have capital expenditures of approximately $227 million throughout the remainder of fiscal 1997. 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 1997. -9- THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. PART II. OTHER INFORMATION --------------------------- Item 1. Legal Proceedings ----------------- None Item 2. Changes in Securities --------------------- None Item 3. Defaults Upon Senior Securities ------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- At its annual meeting of Shareholders, held on July 15, 1997, there were 35,024,173 shares or 91.6% of the 38,248,966 shares outstanding and entitled to vote represented either in person or by proxy. The 11 Board of Directors nominated to serve for a one-year term were all elected, with each receiving an affirmative vote of at least 98.9% 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. Item 5. Other Information ----------------- None Item 6. Exhibits and Reports on Form 8-K -------------------------------- On June 12, 1997, Form 8-K was filed with the Securities and Exchange Commission with regard to the Competitive Advance and Revolving Credit Facilities Agreement dated as of June 10, 1997 between The Great Atlantic & Pacific Tea Company, Inc. and The Great Atlantic & Pacific Company of Canada, Limited as borrowers and a syndicate of banks. -10- THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. Date: July 23, 1997 By: /s/ Kenneth A. Uhl --------------------------------------- Kenneth A. Uhl, Vice President and Controller (Chief Accounting Officer) -11-