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 September 8, 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 September 8, 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)
12 Weeks Ended 28 Weeks Ended
------------------------- ------------------------
Sept. 8, Sept. 9, Sept. 8, Sept. 9,
2001 2000 2001 2000
------------ ------------ ----------- ------------
Sales $2,547,590 $2,439,534 $5,935,884 $5,639,354
Cost of merchandise sold (1,809,093) (1,735,281) (4,236,365) (4,015,756)
---------- ---------- ---------- ----------
Gross margin 738,497 704,253 1,699,519 1,623,598
Store operating, general
and administrative
expense (725,872) (691,844) (1,669,352) (1,573,376)
--------- ---------- ---------- ----------
Income from operations 12,625 12,409 30,167 50,222
Interest expense (19,884) (22,132) (48,944) (51,068)
Interest income 1,892 1,426 3,734 3,290
--------- --------- --------- ---------
(Loss) income before
income taxes (5,367) (8,297) (15,043) 2,444
Benefit (provision) for
income taxes 2,136 2,923 4,673 (2,234)
--------- --------- ---------- ---------
Net (loss) income $ (3,231) $ (5,374) $ (10,370) $ 210
========= ========= ========= =========
(Loss) earnings per share:
Net (loss) income
per share -
basic and diluted $ (0.08) $ (0.14) $ (0.27) $ 0.01
======== ======== ======== =========
Weighted average number
of common shares
outstanding-basic
and diluted * 38,347,216 38,347,216 38,347,216 38,347,216
========== ========== ========== ==========
* Common share equivalents for 2001 and 2000 have been excluded because they are
either antidilutive or zero.
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 - 28 Week Period
------------------------
Balance at beginning
of period
38,347,216 shares $38,347 $456,470 $ - $375,288 $(72,808) $797,297
Net loss (10,370) (10,370)
Other comprehensive
income:
Foreign currency
translation
adjustment (274) (274)
------- -------- --- -------- -------- --------
Balance at end
of period $38,347 $456,470 $ - $364,918 $(73,082) $786,653
======= ======== === ======== ======== ========
FY 2000 - 28 Week Period
------------------------
Balance at beginning
of period
38,367,216 shares $38,367 $457,101 $(441) $411,861 $(60,696) $846,192
Net income 210 210
Other comprehensive
income:
Foreign currency
translation
adjustment (2,500) (2,500)
Minimum pension
liability
adjustment 2,682 2,682
Reversal of restricted
stock grants (20) (631) 441 (210)
Cash dividends
($.10 per share) (7,670) (7,670)
------- -------- ---- -------- -------- --------
Balance at end of period $38,347 $456,470 $ - $404,401 $(60,514) $838,704
======= ======== ==== ======== ======== ========
Comprehensive (Loss) Income
12 Weeks Ended 28 Weeks Ended
-------------------------- ---------------------
Sept. 8, Sept. 9, Sept. 8, Sept. 9,
2001 2000 2001 2000
------------ ------------ ------------ --------
Net (loss) income $(3,231) $(5,374) $(10,370) $210
Foreign currency
translation adjustment (6,702) (1,221) (274) (2,500)
Minimum pension
liability adjustment - - - 2,682
-------- -------- -------- -----
Total comprehensive
(loss) income $(9,933) $(6,595) $(10,644) $ 392
======= ======= ======== =====
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
September 8, February 24,
2001 2001
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and short-term investments $ 159,686 $ 131,550
Accounts receivable 183,903 183,382
Inventories 738,474 783,758
Prepaid expenses and other current assets 104,893 103,164
--------- ---------
Total current assets 1,186,956 1,201,854
--------- ---------
Property:
Property owned 1,746,923 1,805,255
Property leased under capital leases 81,115 84,758
--------- ---------
Property - net 1,828,038 1,890,013
Other assets 191,524 217,936
--------- ---------
Total assets $3,206,518 $3,309,803
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,076 $ 6,195
Current portion of obligations under capital leases 11,300 11,634
Accounts payable 538,133 566,482
Book overdrafts 145,153 108,448
Accrued salaries, wages and benefits 166,150 158,450
Accrued taxes 69,231 62,169
Other accruals 215,207 194,106
--------- ---------
Total current liabilities 1,149,250 1,107,484
--------- ---------
Long-term debt 800,841 915,321
Long-term obligations under capital leases 99,726 106,797
Other non-current liabilities 370,048 382,904
--------- ---------
Total liabilities 2,419,865 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 September 8, 2001 and February 24, 2001,
respectively 38,347 38,347
Additional paid-in capital 456,470 456,470
Accumulated other comprehensive loss (73,082) (72,808)
Retained earnings 364,918 375,288
--------- ---------
Total stockholders' equity 786,653 797,297
--------- ---------
Total liabilities and stockholders' equity $3,206,518 $3,309,803
========== ==========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Cash Flows
(Dollars in thousands)
(Unaudited)
28 Weeks Ended
---------------------------
Sept. 8, 2001 Sept. 9, 2000
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(10,370) $ 210
Adjustments to reconcile net (loss)
income to cash provided
by operating activities:
Store/facilities exit charge reversal - (3,061)
Environmental charge - 3,029
Depreciation and amortization 143,256 135,451
Deferred income tax (benefit) provision (6,617) 376
Loss (gain) on disposal of owned property 9,015 (1,648)
Other changes in assets and liabilities:
(Increase) decrease in receivables (1,229) 33,289
Decrease (increase) in inventories 43,021 (12,344)
(Increase) in prepaid expenses and other
current assets (15,171) (2,413)
Decrease (increase) in other assets 6,627 (2,075)
(Decrease) in accounts payable (25,337) (13,450)
Increase in accrued salaries,
wages and benefits 8,260 6,165
Increase in accrued taxes 7,123 7,974
(Decrease) in other accruals and other
liabilities (572) (33,450)
Other operating activities, net 6,256 80
------- -------
Net cash provided by operating activities 164,262 118,133
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (123,481) (241,643)
Proceeds from disposal of property 73,963 16,538
-------- --------
Net cash used in investing activities (49,518) (225,105)
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt (5,000) 18,000
Proceeds under revolving lines of credit 827,506 90,000
Payments on revolving lines of credit (917,594) (45,000)
Proceeds from long-term borrowings 852 19,454
Payments on long-term borrowings (22,362) (2,086)
Principal payments on capital leases (6,338) (5,973)
Increase in book overdrafts 36,937 12,913
Cash dividends - (7,670)
------- -------
Net cash provided by financing activities (85,999) 79,638
Effect of exchange rate changes on cash
and short-term investments (609) (875)
------- --------
Net increase (decrease) in cash and
short-term investments 28,136 (28,209)
Cash and short-term investments at beginning
of period 131,550 124,603
------- -------
Cash and short-term investments at end of period $159,686 $96,394
======== =======
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 12 and 28 week periods ended
September 8, 2001 and September 9, 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 strategic initiatives 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.
2. Income Taxes
The income tax provision/benefit recorded for the 28 week period 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
28 weeks ended September 8, 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 $5.9 million or 39.0%
of the loss before income taxes.
During the quarter ended September 8, 2001, the Ontario government enacted
corporate income tax rate changes, gradually reducing the rate from 14% to 8% by
January 1, 2005. This additional Canadian tax rate reduction had no impact on
the financial statements for the 12 and 28 weeks ended September 8, 2001.
3. Wholesale Franchise Business
As of September 8, 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 $154 million and $146 million for the second quarters of
fiscal 2001 and 2000, respectively, and $362 million and $334 million for the 28
week periods ended in fiscal 2001 and 2000. 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 $2.5 million and
$3.7 million, are included in accounts receivable at September 8, 2001 and
February 24, 2001, respectively. The long-term portion of the inventory notes
and equipment leases amounting to approximately $48.0 million and $55.3 million
are included in other assets at September 8, 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 June 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.
In June 2001, the FASB issued SFAS No. 143, "Accounting For Asset
Retirement Obligations". This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. This standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period incurred. When the liability is initially
recorded, the entity capitalizes a cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain of loss upon settlement.
The Company is required to adopt the provisions of SFAS No. 143 at the beginning
of fiscal 2002. The Company has not determined the impact, if any, the adoption
of this statement will have on its financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". This Statement also amends ARB No. 51, "Consolidated Financial
Statements", to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. This Statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. This Statement also broadens
the presentation of discontinued operations to include more disposal
transactions. The provisions of this Statement are required to be adopted by the
Company at the beginning of fiscal 2002. The Company has not determined the
impact, if any, adoption of this statement will have on its financial position
or results of operations.
5. Store and Facilities Exit Costs
In May 1998, the Company initiated an assessment 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 $28.5 million of the total net severance charges from the time
of the original charges through the September 8, 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) 2,331 - - 2,331
Utilization (2) (11,909) (320) - (12,229)
------- ------- ------- -------
Reserve Balance at
September 8, 2001 $73,283 $ 2,401 $ - $75,684
======= ======= ======= =======
(1) The addition to store occupancy of $2.3 million during the 28 weeks ended
September 8, 2001 and $5.1 million during fiscal 2000, respectively,
represent the present value of accrued interest related to lease
obligations.
(2) Store occupancy utilization of $11.9 million represents lease and other
occupancy payments made during the 28 weeks ended September 8, 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 $224
million net 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 $75.7 million as of September 8, 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 September 8, 2001, approximately $12.3 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 12 and 28 weeks
ended September 8, 2001 and September 9, 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 was closed during the second quarter of fiscal
2001. The operating results of this store are as follows:
(In thousands) 12 Weeks Ended 28 Weeks Ended
-------------------------- --------------------------
September 8, September 9, September 8, September 9,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales $ 16 $ 163 $ 197 $ 377
====== ====== ====== ======
Operating Loss $ (62) $ (4) $ (108) $ (71)
====== ====== ====== ======
6. 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 included in the Company's Fiscal 2000
Annual Report. The Company measures segment performance based upon operating
profit.
Interim information on segments is as follows:
(Dollars in thousands)
12 Weeks Ended 28 Weeks Ended
------------------------- ----------------------
Sept. 8, Sept. 9, Sept. 8, Sept. 9,
2001 2000 2001 2000
----------- ----------- ---------- ----------
Sales
U.S. Retail $1,977,265 $1,899,170 $4,607,193 $4,385,014
Canada Retail 416,431 394,362 967,008 920,078
Canada Wholesale 153,894 146,002 361,683 334,262
---------- ---------- ---------- ----------
Total Company $2,547,590 $2,439,534 $5,935,884 $5,639,354
========== ========== ========== ==========
Depreciation and
amortization
U.S. Retail $ 52,728 $ 51,281 $ 124,388 $ 118,387
Canada Retail 8,323 7,522 18,868 17,064
Canada Wholesale - - - -
----------- ----------- ----------- ----------
Total Company $ 61,051 $ 58,803 $ 143,256 $ 135,451
=========== =========== =========== =========
Income from operations
U.S. Retail $ (1,199) $ 2,268 $ 6,361 $ 23,472
Canada Retail 7,881 5,812 10,026 16,127
Canada Wholesale 5,943 4,329 13,780 10,623
----------- ----------- ----------- ---------
Total Company $ 12,625 $ 12,409 $ 30,167 $ 50,222
=========== =========== =========== =========
(Loss) income before
income taxes
U.S. Retail $ (18,068) $ (16,441) $ (35,915) $(19,647)
Canada Retail 6,533 3,500 6,559 10,838
Canada Wholesale 6,168 4,644 14,313 11,253
----------- ----------- ------------ --------
Total Company $ (5,367) $ (8,297) $ (15,043) $ 2,444
=========== =========== ============ =========
Capital expenditures
U.S. Retail $ 39,400 $ 82,211 $ 102,055 $202,889
Canada Retail 3,163 17,969 21,426 38,754
Canada Wholesale - - - -
----------- ----------- ------------ --------
Total Company $ 42,563 $ 100,180 $ 123,481 $241,643
=========== =========== ============ ========
September 8, February 24,
2001 2001
------------ ------------
Total assets
U.S. Retail $ 2,616,563 $ 2,679,217
Canada Retail 513,555 548,801
Canada Wholesale 76,400 81,785
------------ ------------
Total Company $ 3,206,518 $ 3,309,803
============ ============
7. Supply Chain and Business Process Strategic Initiatives
On March 13, 2000, the Company announced 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 these initiatives. 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 related to software purchases of
approximately $29 million were to be repaid over the next several months.
Accordingly, as of September 8, 2001, approximately $25 million had been repaid
and $4 million was payable related to software. Additionally, 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 September 8, 2001, approximately $27
million had been funded related to hardware leases, and as a result,
approximately $15 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".
8. 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 $45 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 fiscal 2001, the Company sold 7 additional properties and simultaneously
leased them back from the purchaser. The properties subject to this sale had a
carrying value of approximately $37 million. Net proceeds received by the
Company related to these transactions amounted to approximately $50 million. Of
the 7 properties sold, 5 were sold for a profit resulting in a gain after
deducting expenses of approximately $15 million. This gain will be deferred and
amortized over the life of the respective leases as a reduction of rental
expense. Two properties in the aforementioned transaction were sold at a loss of
approximately $4 million after expenses. The majority of this loss was related
to one of these properties, which 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.
The resulting leases of the 19 properties sold in fiscal 2000 and 2001 have
terms ranging from 20 to 25 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 $ 7,832
2002 18,795
2003 18,795
2004 18,795
2005 18,795
2006 and thereafter 306,189
-------
Total $389,201
========
During the remainder of fiscal 2001, the Company expects to enter into similar
transactions with 2 other owned properties.
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
12 Weeks Ended September 8, 2001 Compared to 12 Weeks Ended September 9, 2000
Sales for the 12 weeks ended September 8, 2001 of $2,548 million
increased $108 million or 4.4% from sales of $2,440 million for the 12
weeks ended September 9, 2000. The increase in sales is due to increases in
retail sales of $100 million and wholesale sales of $8 million. The
increase in retail sales is attributable to the opening of 41 new stores
since the beginning of the second quarter of fiscal 2000, of which 8 were
opened in fiscal 2001, increasing sales by $114 million. Additionally,
comparable store sales for the second quarter of fiscal 2001, which include
replacement stores, increased $59 million or 2.7% when compared to the
second quarter of fiscal 2000. This increase was partially offset by the
closure of 49 stores since the beginning of the second quarter of fiscal
2000, of which 18 were closed in fiscal 2001, which decreased sales $57
million, and the unfavorable effect of the Canadian exchange rate which
decreased sales $16 million. The increase in wholesale sales is
attributable to higher sales volume of $14 million partially offset by the
unfavorable effect of the Canadian exchange rate which decreased sales by
$6 million.
Average weekly sales per supermarket were approximately $275,100 for the 12 week
period ended September 8, 2001 versus $262,400 for the corresponding period of
the prior year, an increase of 4.8%. Sales in the U.S. during the second quarter
of fiscal 2001 increased by $78.1 million or 4.1% compared to the second quarter
of fiscal 2000. Sales in Canada during the second quarter of fiscal 2001
increased $30.0 million or 5.5% compared to the second quarter of fiscal 2000.
Gross margin as a percentage of sales increased 12 basis points to 28.99% for
the 12 week period ended September 8, 2001 from 28.87% for the 12 week period
ended September 9, 2000. The gross margin dollar increase of $34.2 million
resulted from increases in sales volume and the gross margin rate partially
offset by a decrease in the Canadian exchange rate.
Store operating, general and administrative expense ("SG&A") was $725.9 million
for the 12 weeks ended September 8, 2001 compared to $691.8 million for the
corresponding period of the prior year. As a percentage of sales, SG&A increased
from 28.36% in the second quarter of fiscal 2000 to 28.49% in the second quarter
of fiscal 2001.
Included in SG&A for the 12 weeks ended September 8, 2001 and September 9, 2000
are costs relating to the supply chain and business process strategic
initiatives of $21.5 million and $17.0 million, respectively. These costs
primarily included professional consulting fees and salaries, including related
benefits, of employees working full-time on the initiatives. Excluding the
charges described above, as a percentage of sales, SG&A decreased from 27.66%
for the 12 week period ended September 9, 2000 to 27.65% for the 12 week period
ended September 8, 2001.
Interest expense of $19.9 million for the second quarter of fiscal 2001
decreased from the prior year quarter amount of $22.1 million. This was
primarily due to decreased borrowing requirements in the second quarter of
fiscal 2001 compared to fiscal 2000 as a result of lower capital expenditures, a
reduction in working capital, and the proceeds received on the sale leaseback
transaction described in Note 8 of the Consolidated Financial Statements. The
reduction is also partially due to a decrease in interest rates.
The loss before income taxes for the 12 week period ended September 8, 2001 was
$5.4 million compared to a loss before income taxes of $8.3 million for the
comparable period in the prior year, an improvement of $2.9 million. The
improvement is attributable principally to the increase in gross margin
and lower interest expense partially offset by higher SG&A.
The benefit from income taxes for the 12 weeks ended September 8, 2001 was $2.1
million compared to a benefit from income taxes of $2.9 million in the
comparable period of fiscal 2000. The effective tax rates for the second
quarters of fiscal 2001 and 2000 were 39.8% and 35.2%, respectively. These
benefits from income taxes for the second quarters of fiscal 2001 and 2000
reflect the estimated expected annual tax rates applied to its respective
domestic and foreign financial results.
During the second quarter of fiscal 2001, the Ontario government enacted
corporate income tax rate changes, gradually reducing the rate from 14% to 8% by
January 1, 2005. This Canadian tax rate reduction did not have an impact on the
financial statements for the 12 weeks ended September 8, 2001.
Based on these overall results, the net loss for the 12 weeks ended September 8,
2001 was $3.2 million or $0.08 per share - basic and diluted, as compared to a
net loss of $5.4 million or $0.14 per share - basic and diluted in the prior
year. The improvement in net loss from the second quarter of fiscal 2000 to the
second quarter of fiscal 2001 is attributable principally to the increase in
gross margin and lower interest expense partially offset by higher SG&A and a
lower benefit from income taxes due to the improved loss before income taxes.
28 Weeks Ended September 8, 2001 Compared to 28 Weeks Ended September 9, 2000
Sales for the 28 weeks ended September 8, 2001 of $5,936 million increased $297
million or 5.3% from sales of $5,639 million for the 28 weeks ended September 9,
2000. The increase in sales is due to increases in retail sales of $269 million
and wholesale sales of $28 million. The increase in retail sales is attributable
to the opening of 47 new stores in fiscal 2000 and 8 new stores in fiscal 2001,
increasing sales by $294 million. Additionally, comparable store sales for the
second quarter of fiscal 2001, which include replacement stores, increased $168
million or 3.3% when compared to the second quarter of fiscal 2000. This
increase was partially offset by the closure of 49 stores in fiscal 2000 and 18
stores in fiscal 2001 which decreased sales $150 million and the unfavorable
effect of the Canadian exchange rate which decreased sales $43 million. The
increase in wholesale sales is attributable to higher sales volume of $44
million partially offset by the unfavorable effect of the Canadian exchange rate
which decreased sales by $16 million.
Average weekly sales per supermarket were approximately $273,800 for the 28 week
period ended September 8, 2001 versus $259,700 for the corresponding period of
the prior year, an increase of 5.4%. Sales in the U.S. during the 28 weeks ended
September 8, 2001 increased by $222.2 million or 5.1% compared to fiscal 2000.
Sales in Canada during the 28 weeks ended September 8, 2001 increased $74.3
million or 5.9% compared to fiscal 2000.
Gross margin as a percentage of sales decreased 16 basis points to 28.63% for
the 28 week period ended September 8, 2001 from 28.79% for the 28 week period
ended September 9, 2000. The gross margin dollar increase of $75.9 million
resulted from an increase in sales volume partially offset by decreases in the
gross margin rate and the Canadian exchange rate.
SG&A was $1,669.4 million for the 28 weeks ended September 8, 2001 compared to
$1,573.4 million for the corresponding period of the prior year. As a
percentage of sales, SG&A increased from 27.90% for the 28 weeks ended
September 9, 2000 to 28.12% for the 28 weeks ended September 8, 2001.
Included in cost of merchandise sold and SG&A are costs relating to the supply
chain and business process strategic initiatives of $5.6 million and $48.9
million for the 28 weeks ended September 8, 2001, respectively, and $0 and $34.1
million for the 28 weeks ended September 9, 2000, respectively. The costs
included in cost of merchandise sold for the 28 weeks ended September 8, 2001,
which lowered gross margin as a percentage of sales by 10 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 for both periods
primarily included professional consulting fees and salaries, including related
benefits, of employees working full-time on the initiatives. Also included in
the first half of fiscal 2000 SG&A was $3.0 million of estimated environmental
clean up costs for a non-retail property. Partially offsetting the fiscal 2000
expense was a reversal of $3.1 million of charges related to the store closure
initiative 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 was 27.30% for both the 28 week period ended September 9, 2000 and the 28
week period ended September 8, 2001.
Interest expense of $48.9 million for the 28 week period ended September 8, 2001
decreased from the prior year amount of $51.0 million. This was due to decreased
borrowing requirements during fiscal 2001 compared to fiscal 2000 as a result of
lower capital expenditures, a reduction in working capital, and the proceeds
received on the sale leaseback transaction described in Note 8 of the
Consolidated Financial Statements. The reduction is also partially due to a
decrease in interest rates.
The loss before income taxes for the 28 week period ended September 8, 2001 was
$15.0 million compared to income before income taxes of $2.4 million for the
comparable period in the prior year, a decrease of $17.4 million. The loss is
attributable principally to the increase in SG&A and the lower gross margin rate
partially offset by lower interest expense.
The benefit from income taxes for the 28 weeks ended September 8, 2001 was $4.7
million compared to a provision for income taxes of $2.2 million in the
comparable period of fiscal 2000. This benefit from income taxes for the 28
weeks ended September 8, 2001 reflects 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 half 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 half 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 $5.9 million or 39.0% of the loss before
income taxes.
During the 28 weeks ended September 8, 2001, the Ontario government enacted
corporate income tax rate changes, gradually reducing the rate from 14% to 8% by
January 1, 2005. This Canadian tax rate reduction did not have an impact on the
financial statements for the 28 weeks ended September 8, 2001.
Based on these overall results, the net loss for the 28 weeks ended September 8,
2001 was $10.4 million or $0.27 per share - basic and diluted, as compared to
net income of $0.2 million or $0.01 per share - basic and diluted. The decrease
in net income of $10.6 million from the first half of fiscal 2000 to the first
half of fiscal 2001 is attributable principally to the lower gross margin rate,
the increase in SG&A and the change in the Canadian corporate income tax rate,
partially offset by lower interest expense.
Liquidity and Capital Resources
The Company had working capital of $37.7 million at September 8, 2001 compared
to $94.4 million at fiscal 2000 year end. The Company had cash and short-term
investments aggregating $159.7 million at September 8, 2001 compared to $131.6
million as of fiscal 2000 year end, including $26.9 million in short-term
investments at September 8, 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, as well as a decrease in
inventories. This is partially offset by increases in short-term investments, as
well as a decrease in accounts payable.
The Company has a $425 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 $85 million (C$133 million at September
8, 2001). As of September 8, 2001, the Company had $100 million of borrowings
under the Secured Credit Agreement. Accordingly, as of September 8, 2001, after
reducing availability for outstanding letters of credit and inventory
requirements, the Company had $282 million available under the Secured Credit
Agreement. Borrowings under the agreement bear interest at the weighted average
rate of 6.20% as of September 8, 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 September 8, 2001, the
Company was in compliance with the covenants on the notes and the Secured Credit
Agreement.
As described in Note 7 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 the supply chain and business process strategic initiatives. 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 related
to software purchases of approximately $29 million were to be repaid over the
next several months. Accordingly, as of September 8, 2001, approximately $25
million had been repaid and $4 million was payable related to software.
Additionally, 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
September 8, 2001, approximately $27 million had been funded related to hardware
leases and, as a result, approximately $15 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 September 8, 2001 at terms determined by market conditions at
the time of sale.
As described in Note 8 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 fiscal 2001, the Company sold 7 properties and
simultaneously leased them back from the purchaser. Net proceeds received by the
Company related to these transactions amounted to approximately $50 million.
During the remainder of fiscal 2001, the Company expects to enter into similar
transactions with 2 other owned properties with expected gross proceeds of
approximately $15 million.
During the 28 weeks ended September 8, 2001, the Company funded its capital
expenditures, debt repayments, and expenses related to the supply chain and
business process strategic initiatives through internally generated funds
combined with proceeds from disposals of property and revolving lines of credit.
Capital expenditures totaled $123 million during the 28 weeks ended September 8,
2001, which included 8 new supermarkets, and 10 major remodels or enlargements,
and the Company's capital expenditures related to the supply chain and business
process strategic initiatives. Capital expenditures are expected to be
approximately $135 million for the remainder of the fiscal year, which includes
approximately 12 new supermarkets, as well as capital expenditures related to
the supply chain and business process strategic initiatives.
During the 28 weeks ended September 28, 2001, the Company incurred expenses
related to the supply chain and business process strategic initiatives of
approximately $54 million before tax benefits. For the remainder of fiscal 2001,
the Company plans to incur approximately an additional $45 million in expenses,
before tax benefits, related to the supply chain and business process strategic
initiatives.
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 September 8, 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 supply chain and business
process strategic initiatives expenses, other capital expenditure programs, and
mandatory scheduled debt repayments throughout the next twelve months.
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 September 8,
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 September 8, 2001, a 1% change in
LIBOR would result in interest expense fluctuating approximately $1.0 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 12 and 28 week periods ended
September 8, 2001, a change in the Canadian currency of 10% would have resulted
in a fluctuation in net income of $0.7 million and $1.0 million, respectively.
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
None
(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: October 23, 2001 By: /s/ Kenneth A. Uhl
------------------------------
Kenneth A. Uhl, Vice President and
Controller (Chief Accounting Officer)