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 DECEMBER 1, 2007
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 [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN
ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED
FILER AND LARGE ACCELERATED FILER" IN RULE 12b-2 OF THE EXCHANGE ACT. (CHECK
ONE):
LARGE ACCELERATED FILER [ ] ACCELERATED FILER [X] NON-ACCELERATED FILER [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN
RULE 12b-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
AS OF JANUARY 4, 2008 THE REGISTRANT HAD A TOTAL OF 57,000,320 SHARES OF COMMON
STOCK - $1 PAR VALUE OUTSTANDING.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
12 Weeks Ended 40 weeks Ended
---------------------------------- ---------------------------------
Dec. 1, 2007 Dec. 2, 2006 Dec. 1, 2007 Dec. 2, 2006
-------------- -------------- -------------- -------------
Sales $ 1,251,123 $ 1,213,476 $ 4,204,630 $ 4,103,430
Cost of merchandise sold (869,448) (837,749) (2,901,336) (2,828,584)
-------------- -------------- -------------- -------------
Gross margin 381,675 375,727 1,303,294 1,274,846
Store operating, general and administrative
expense (402,808) (381,426) (1,323,411) (1,294,499)
-------------- -------------- -------------- -------------
Loss from operations (21,133) (5,699) (20,117) (19,653)
Gain (loss) on sale of Canadian operations 495 (599) 209 (890)
Gain on disposition of Metro, Inc. 106,063 -- 184,451 --
Interest expense (14,499) (15,342) (48,806) (50,167)
Interest and dividend income 3,910 1,697 12,231 7,977
Equity in earnings of Metro, Inc. -- 11,023 7,869 30,840
-------------- -------------- -------------- -------------
Income (loss) from continuing operations
before income taxes 74,836 (8,920) 135,837 (31,893)
(Provision for) benefit from income taxes (1,754) 41,177 (4,288) 55,632
-------------- -------------- -------------- -------------
Income from continuing operations 73,082 32,257 131,549 23,739
Discontinued operations:
(Loss) income from operations of
discontinued businesses, net of tax
provision of $0 and $180 for the 12
weeks ended 12/1/07 and 12/2/06,
respectively, and net of tax benefit
of $0 and $593 for the 40 weeks
ended 12/1/07 and 12/2/06, respectively (13,540) 651 (179,667) 2,758
(Loss) gain on disposal of discontinued
businesses, net of tax benefit of $0
and $2,158 for the 12 weeks ended
12/1/07 and 12/2/06, respectively, and
$0 and $2,100 for the 40 weeks ended
12/1/07 and 12/2/06, respectively (2,235) 7,799 (51,039) 7,590
-------------- -------------- -------------- -------------
(Loss) income from discontinued operations (15,775) 8,450 (230,706) 10,348
-------------- -------------- -------------- -------------
Net income (loss) $ 57,307 $ 40,707 $ (99,157) $ 34,087
============== ============== ============== =============
Net income (loss) per share - basic:
Continuing operations $ 1.74 $0.78 $ 3.14 $ 0.57
Discontinued operations (0.38) 0.20 (5.51) 0.25
-------------- -------------- -------------- -------------
Net income (loss) per share - basic $ 1.36 $ 0.98 $ (2.37) $ 0.82
============== ============== ============== =============
Net income (loss) per share - diluted:
Continuing operations $ 1.73 $ 0.77 $ 3.11 $ 0.57
Discontinued operations (0.38) 0.20 (5.45) 0.24
-------------- -------------- -------------- -------------
Net income (loss) per share - diluted $ 1.35 $ 0.97 $ (2.34) $ 0.81
============== ============== ============== =============
Weighted average number of common shares
outstanding 41,961,253 41,499,554 41,888,969 41,403,346
Common stock equivalents 402,650 520,892 417,379 501,420
-------------- -------------- -------------- -------------
Weighted average number of common and
common equivalent shares outstanding 42,363,903 42,020,446 42,306,348 41,904,766
============== ============== ============== =============
See Notes to Quarterly Report
2
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands, except share amounts)
(Unaudited)
Retained Accumulated
Common Stock Additional Earnings Other Total
------------------------- Paid-in (Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit) Income Equity
---------- ---------- ----------- ------------- ------------- -------------
40 WEEK PERIOD ENDED DECEMBER 1, 2007
Balance at beginning of period,
as previously reported 41,589,195 $ 41,589 $ 212,868 $ 153,325 $ 22,888 $ 430,670
Impact of the adoption of change in
measurement date under FAS 158 (643) (643)
Cumulative impact of
the adoption of FIN48 24,421 24,421
---------- ---------- ----------- ------------- ------------- -------------
Balance at beginning of period,
as adjusted 41,589,195 41,589 212,868 177,103 22,888 454,448
Net loss (99,157) (99,157)
Other comprehensive loss (10,802) (10,802)
Stock options exercised 368,974 369 5,848 6,217
Tax benefit on stock options 2,374 2,374
Other share based awards 6,597 7 7,275 7,282
---------- ---------- ----------- ------------- ------------- -------------
Balance at end of period 41,964,766 $ 41,965 $ 228,365 $ 77,946 $ 12,086 $ 360,362
========== ========== =========== ============= ============= =============
40 WEEK PERIOD ENDED DECEMBER 2, 2006
Balance at beginning of period 41,148,987 $ 41,149 $ 497,193 $ 126,432 $ 6,953 $ 671,727
Net income 34,087 34,087
Other comprehensive income 3,566 3,566
Cash dividends on common stock -
$7.25 per share (299,089) (299,089)
Stock options exercised 333,161 333 4,700 5,033
Other share based awards 26,104 26 6,626 6,652
---------- ---------- ----------- ------------- ------------- -------------
Balance at end of period 41,508,252 $ 41,508 $ 209,430 $ 160,519 $ 10,519 $ 421,976
========== ========== =========== ============= ============= =============
COMPREHENSIVE (LOSS) INCOME
12 Weeks Ended 40 weeks Ended
------------------------------ --------------------------------
Dec. 1, 2007 Dec. 2, 2006 Dec. 1, 2007 Dec. 2, 2006
------------ ------------ ------------ ------------
Net income (loss) $ 57,307 $ 40,707 $ (99,157) $ 34,087
------------ ------------ ------------ ------------
Foreign currency translation adjustment, net of tax (34,268) (9,398) (9,710) 2,904
Reclassification adjustment for sale of investment
securities, net of tax (115,385) -- -- --
Net unrealized gain on marketable securities, net of tax -- 277 22 662
Pension and other post-retirement benefits, net of tax (334) -- (1,114) --
------------ ------------ ------------ ------------
Other comprehensive (loss) income, net of tax (149,987) (9,121) (10,802) 3,566
------------ ------------ ------------ ------------
Total comprehensive (loss) income $ (92,680) $ 31,586 $ (109,959) $ 37,653
============ ============ ============ ============
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BALANCES
Net Unrealized Net Unrealized Pension Accumulated
Foreign Gain on (Loss) Gain & Other Other
Currency Investment on Marketable Post-retirement Comprehensive
Translation Securities Securities Benefits Income
------------- -------------- -------------- --------------- -------------
Balance at February 24, 2007 $ 9,710 $ -- $ (22) $ 13,200 $ 22,888
Current period change (9,710) -- 22 (1,114) (10,802)
------------- -------------- -------------- --------------- ------------
Balance at December 1, 2007 $ -- $ -- $ -- $ 12,086 $ 12,086
============= ============== ============== =============== ============
Balance at February 25, 2006 $ 12,874 $ -- $ (1,015) $ (4,906) $ 6,953
Current period change 2,904 -- 662 -- 3,566
------------- -------------- -------------- --------------- ------------
Balance at December 2, 2006 $ 15,778 $ -- $ (353) $ (4,906) $ 10,519
============= ============== ============== =============== ============
See Notes to Quarterly Report
3
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts)
December 1, 2007 February 24, 2007
---------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 69,410 $ 86,194
Restricted cash 542,109 51,176
Restricted marketable securities -- 20,335
Accounts receivable, net of allowance for doubtful accounts of $5,564
and $4,514 at December 1, 2007 and February 24, 2007, respectively 85,493 117,082
Inventories 334,713 411,370
Prepaid expenses and other current assets 81,317 62,751
---------------- -----------------
Total current assets 1,113,042 748,908
---------------- -----------------
Non-current assets:
Property:
Property owned 745,199 919,322
Property leased under capital leases 12,461 20,676
---------------- -----------------
Property - net 757,660 939,998
Equity investment in Metro, Inc. -- 368,871
Other assets 192,313 53,846
---------------- -----------------
Total assets $ 2,063,015 $ 2,111,623
================ =================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 92 $ 32,069
Current portion of obligations under capital leases 1,375 1,554
Accounts payable 165,546 197,500
Book overdrafts 33,281 31,833
Accrued salaries, wages and benefits 91,625 115,719
Accrued taxes 28,801 34,452
Other accruals 142,776 145,264
---------------- -----------------
Total current liabilities 463,496 558,391
---------------- -----------------
Non-current liabilities:
Long-term debt 225,436 284,214
Long-term obligations under capital leases 28,522 29,938
Long-term real estate liabilities 282,866 300,832
Deferred real estate income 24,385 --
Other non-current liabilities 677,948 507,578
---------------- -----------------
Total liabilities 1,702,653 1,680,953
---------------- -----------------
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 - 41,964,766 and 41,589,195
shares at December 1, 2007 and February 24, 2007, respectively 41,965 41,589
Additional paid-in capital 228,365 212,868
Accumulated other comprehensive income 12,086 22,888
Retained earnings 77,946 153,325
---------------- -----------------
Total stockholders' equity 360,362 430,670
---------------- -----------------
Total liabilities and stockholders' equity $ 2,063,015 $ 2,111,623
================ =================
See Notes to Quarterly Report
4
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
40 weeks Ended
-----------------------------
Dec. 1, 2007 Dec. 2, 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (99,157) $ 34,087
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Asset disposition initiatives 120,422 3,673
Depreciation and amortization 122,614 135,775
Income tax benefit -- (61,545)
Loss (gain) on disposal of owned property and write-down of property, net 2,514 (17,844)
Loss (gain) on disposal of discontinued operations 51,039 (7,590)
Other property impairments 3,551 3,552
(Gain) loss on sale of Canadian operations (209) 890
Other share based awards 7,282 6,652
Equity in earnings of Metro, Inc. (7,869) (30,840)
Proceeds from dividends from Metro, Inc. -- 5,067
Gain on disposition of Metro, Inc. (184,451) --
Other changes in assets and liabilities:
Decrease in receivables 31,915 49,780
Decrease (increase) in inventories 72,741 (32,401)
Increase in prepaid expenses and other current assets (14,230) (16,486)
Increase in other assets (3,131) (2,897)
Decrease in accounts payable (27,285) (10,221)
Decrease in accrued salaries, wages, benefits and taxes (56,368) (30,508)
Decrease in other accruals (2,012) (57,063)
Decrease in other non-current liabilities (42,559) (20,381)
Other operating activities, net 2,386 5,436
------------ ------------
Net cash used in operating activities (22,807) (42,864)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (98,447) (184,017)
Proceeds from disposal of property 121,583 37,489
Purchase of business (765) (24,652)
Disposal related expenditures for sale of Canadian operations (395) (890)
Acquisition related expenditures for the purchase of Pathmark Stores, Inc. (18,668) --
(Increase) decrease in restricted cash (490,933) 142,724
Net proceeds from the sale of shares of Metro, Inc. 551,238 --
Purchases of marketable securities -- (148,700)
Proceeds from maturities of marketable securities 20,446 230,904
------------ ------------
Net cash provided by investing activities 84,059 52,858
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds under revolving lines of credit 459,200 1,262,900
Principal payments on revolving lines of credit (517,900) (1,134,400)
Principal payments on long-term borrowings (31,977) (66)
Total long term real estate liabilities 6,419 3,365
Principal payments on capital leases (2,715) (4,098)
Increase in book overdrafts 1,448 19,673
Deferred financing fees (257) (233)
Acquisition related expenditures for financing the purchase of Pathmark Stores, Inc. (865) --
Dividends paid -- (299,089)
Tax benefit on stock options 2,374 --
Proceeds from exercises of stock options 6,217 5,033
------------ ------------
Net cash used in financing activities (78,056) (146,915)
Effect of exchange rate changes on cash and cash equivalents 20 80
------------ ------------
Net decrease in cash and cash equivalents (16,784) (136,841)
Cash and cash equivalents at beginning of period 86,194 229,589
------------ ------------
Cash and cash equivalents at end of period $ 69,410 $ 92,748
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 17,380 $ 20,504
Cash paid during the year for income taxes $ 1,853 $ 4,952
See Notes to Quarterly Report
5
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
1. BASIS OF PRESENTATION
The accompanying Consolidated Statements of Operations for the 12 and 40 weeks
ended December 1, 2007 and December 2, 2006, Consolidated Statements of
Stockholders' Equity and Comprehensive Income and Consolidated Statements of
Cash Flows for the 40 weeks ended December 1, 2007 and December 2, 2006, and the
Consolidated Balance Sheets at December 1, 2007 and February 24, 2007 of The
Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "Our Company"),
are unaudited and, in the opinion of management, contain all adjustments that
are of a normal and recurring nature necessary for a fair statement of financial
position and results of operations for such periods. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes contained in our revised Fiscal 2006 Annual Report
on Form 8-K dated October 24, 2007. Interim results are not necessarily
indicative of results for a full year.
The consolidated financial statements include the accounts of our Company and
all subsidiaries. Intercompany accounts and transactions have been eliminated.
Our Company used the equity method of accounting for our investment in Metro,
Inc. through March 13, 2007 as we exerted significant influence over substantive
operating decisions made by Metro, Inc. through our membership on Metro, Inc.'s
Board of Directors and its committees and through an information technology
services agreement with Metro, Inc. However, as a result of the sale of
6,350,000 shares of our holdings in Metro, Inc., on March 13, 2007, our Company
began recording our investment in Metro, Inc. under Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115") as a cost investment. On November 26,
2007, our Company sold the remaining 11,726,645 shares of our holdings in Metro,
Inc. As a result of these sales, our Company no longer holds Class A subordinate
shares of Metro, Inc. as our investment has been fully liquidated as of the
balance sheet date.
As discussed in Note 7 - Discontinued Operations, the criteria necessary to
classify the operations for the Midwest and the Greater New Orleans area as
discontinued have been satisfied and as such, have been reclassified in our
Consolidated Statements of Operations for the 12 and 40 weeks ended December 1,
2007 and December 2, 2006.
2. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an
Interpretation of FASB Statement 109 ("FIN 48"), which clarifies the accounting
for uncertainty in tax positions. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 requires
that we determine whether the benefits of our tax positions are more likely than
not of being sustained upon audit based on the technical merits of the tax
position. For tax positions that are more likely than not of being sustained
upon audit, we recognize the largest amount of the benefit that is more likely
than not of being sustained in our Consolidated Financial Statements. For tax
positions that are not more likely than not of being sustained upon audit, we do
not
6
recognize any portion of the benefit in our Consolidated Financial Statements.
The provisions of FIN 48 also provide guidance on derecognition, classification,
interest and penalties, accounting in interim periods, and disclosure. We
adopted these requirements as of February 25, 2007.
The cumulative effect of the adoption of the recognition and measurement
provisions of FIN 48 resulted in a $24.4 million increase to the February 25,
2007 balance of retained earnings. Results of prior periods have not been
restated. Our policy for interest and penalties under FIN 48 related to income
tax exposures was not impacted as a result of the adoption of the recognition
and measurement provisions of FIN 48. Therefore, we continue to recognize
interest and penalties as incurred within "(Provision for) benefit from income
taxes" in our Consolidated Statements of Operations. Refer to Note 11 - Income
Taxes for further discussion.
In October 2004, the government passed the Homeland Investment Act which allows
companies to repatriate cash balances from their controlled foreign subsidiaries
at a reduced rate. This was achieved by permitting a one time 85% dividends
received deduction. Our Company completed the sale of our Canadian subsidiary to
Metro, Inc. during fiscal 2005. As a result of this transaction, our Company
repatriated $949.0 million from our foreign subsidiaries, of which $500.0
million is intended to qualify for the 85% dividends received deduction. Until
such time as the taxing authorities have affirmed the adequacy of our Company's
Domestic Reinvestment Plan, the balance sheet is and will be grossed-up to
reflect liabilities for uncertain tax positions and deferred tax assets for net
operating losses in accordance with FIN 48.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting principles, and
expands disclosures about fair value measurements. The provisions of SFAS 157
are effective for fiscal years beginning after November 15, 2007 (our year
ending February 28, 2009). Our Company is currently evaluating the impact, if
any, of the provisions of SFAS 157.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 was issued to
improve the overall financial statement presentation of pension and other
postretirement plans and does not impact the determination of net periodic
benefit cost or the measurement of plan assets or obligations. This standard
requires companies to recognize the funded status of their defined benefit
pension and other postretirement benefit plans as a net liability or asset on
their balance sheets and requires any unrecognized prior service costs and
actuarial gains or losses to be recognized as a component of accumulated other
comprehensive income or loss. We adopted these requirements as of February 24,
2007. Additionally, SFAS 158 no longer allows companies to measure their plans
as of any date other than the end of their fiscal year; however, this provision
is not effective for companies until fiscal years ending after December 15, 2008
(our year ending February 28, 2009). We have chosen to early adopt this
requirement in fiscal 2007. We used the second approach as described in
paragraph 19 of SFAS 158 to transition our measurement date from December 31,
2006 to February 24, 2007. Under this approach, we have recorded an adjustment
to opening retained earnings in the amount of $0.6 million to decrease the
February 25, 2007 balance of retained earnings. Refer to Note 9 - Retirement
Plans and Benefits for further discussion.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value.
7
Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings at each subsequent reporting date. The
provisions of SFAS 159 are effective for fiscal years beginning after November
15, 2007 (our year ending February 28, 2009). Our Company is currently
evaluating the impact, if any, of the provisions of SFAS 159.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
141R"). SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, the goodwill acquired, and any noncontrolling
interest in the acquiree. This statement also establishes disclosure
requirements to enable the evaluation of the nature and financial effect of the
business combination. SFAS 141(R) is effective for fiscal years beginning after
December 15, 2008 (our year ended February 27, 2010). Our Company is currently
evaluating the impact, if any of the provisions of SFAS 141R.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements--an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008 (our year ended February 27, 2010). We
have evaluated the provisions of SFAS 160 and the guidance will not have an
impact on our Company's financial condition or results of operations.
3. DEFINITIVE MERGER AGREEMENT WITH PATHMARK STORES, INC.
On March 5, 2007, our Company announced that we have reached a definitive merger
agreement with Pathmark Stores, Inc. in which we will acquire Pathmark Stores,
Inc., ("Pathmark") for $1.4 billion in cash, stock, and debt assumption or
retirement.
On November 27, 2007, our Company announced that the Federal Trade Commission
("FTC") has accepted a proposed consent agreement relating to our acquisition of
Pathmark. The terms of the consent agreement require the divestiture of six
stores located in the state of New York. We have entered into definitive
agreements to sell all six stores and have received FTC approval on these
divestitures.
Included in the Consolidated Statements of Operations for the 12 and 40 weeks
ended December 1, 2007 and December 2, 2006 are the sales and operating results
of the 5 A&P stores that will be closed. The remaining store to be closed was a
Pathmark location as of December 1, 2007 and accordingly the results of
operations of that store were not included in our results of operations. The
results of these operations are as follows:
12 Weeks Ended 40 Weeks Ended
----------------------------- -----------------------------
December 1, December 2, December 1, December 2,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Sales $ 25,696 $ 24,916 $ 85,055 $ 83,038
=========== =========== =========== ===========
Income from operations $ 228 $ 73 $ 704 $ 33
=========== =========== =========== ===========
8
Subsequent to our third quarter end, on December 3, 2007, our acquisition of
Pathmark was completed. Refer to Note 15 - Subsequent Events for further
discussion.
4. INVESTMENT IN METRO, INC.
On March 13, 2007, in connection with our agreement to acquire Pathmark Stores,
Inc., our Company sold 6,350,000 shares of our holdings in Metro, Inc. for
proceeds of approximately $203.5 million resulting in a net gain of $78.4
million. Of the proceeds received, $190 million was held as restricted cash
collateralizing letters of credit under our Letter of Credit Agreement and was
designated to be used to fund a portion of our acquisition of Pathmark Stores,
Inc.
On November 26, 2007, also in connection with our agreement to acquire Pathmark
Stores, Inc., our Company sold the remaining 11,726,645 shares of our holdings
in Metro, Inc. for proceeds of approximately $345.3 million, resulting in a net
gain of $103.6 million. The proceeds were held to fund a portion of our
acquisition of Pathmark Stores, Inc. As a result of these sales, our Company no
longer holds Class A subordinate shares of Metro, Inc. as our investment has
been fully liquidated as of the balance sheet date.
From time to time, we may enter hedging agreements in order to manage risks
incurred in the normal course of business including forward exchange contracts
to manage our exposure to fluctuations in foreign exchange rates. Prior to the
sale of our remaining shares in Metro, Inc., on November 6, 2007, we entered
into a currency exchange forward contract to purchase $380 million United States
dollars to hedge the value of our shares in Metro, Inc. against adverse
movements in exchange rates. Our Company measures ineffectiveness based upon the
change in forward exchange rates. In the third quarter of fiscal 2007 and upon
completion of the sale of our shares of Metro, Inc., this forward contract was
settled.
Upon settlement, the effective portion of this hedge contract resulted in a gain
of approximately $23.9 million during the 12 and 40 weeks ended December 1,
2007, which was offset by a $23.9 million foreign exchange loss from the
underlying investment. This foreign exchange loss would have occurred if the
hedge transaction was not entered into. Both the gain and loss were recorded in
"Gain on disposition of Metro, Inc." in our Consolidated Statements of
Operations for the 12 and 40 weeks ended December 1, 2007.
In addition, we recorded a gain of $2.4 million to settle the forward exchange
contract during the 12 and 40 weeks ended December 1, 2007, as a result of the
favorable movement in the Canadian dollar at the time of sale of our remaining
holdings in Metro, Inc. The gain was recorded in "Gain on disposition of Metro,
Inc." in our Consolidated Statements of Operations for the 12 and 40 weeks ended
December 1, 2007.
Beginning March 13, 2007, as a result of the sale of 6,350,000 shares of Metro,
Inc., our Company recorded our investment in Metro, Inc. under SFAS 115 as a
cost investment on the basis that we no longer exert significant influence over
substantive operating decisions made by Metro, Inc. Previous to March 13, 2007,
we used the equity method of accounting to account for our investment in Metro,
Inc. on the basis that we exerted significant influence over substantive
operating decisions made by Metro, Inc. through our membership on Metro, Inc.'s
Board of Directors and its committees and through an information technology
services agreement.
9
The following table summarizes the status of our Company's investment in Metro,
Inc. from February 24, 2007 through December 1, 2007:
Equity investment at February 24, 2007 $ 368,871
Equity earnings in Metro, Inc. 7,869
------------------
Equity investment at March 13, 2007 376,740
Sale of shares of Metro, Inc. (468,773)
Unrealized gain on investment 19,475
Foreign currency translation gain 72,558
------------------
Investment at December 1, 2007 $ --
==================
Through March 13, 2007, we recorded our pro-rata equity earnings relating to our
equity investment in Metro, Inc. on about a three-month lag period as permitted
by APB 18, "The Equity Method of Accounting for Investments in Common Stock."
Thus, we recorded nil and $7.9 million during the 12 and 40 weeks ended December
1, 2007, respectively, and $11.0 million and $30.8 million during the 12 and 40
weeks ended December 2, 2006, respectively, in equity earnings relating to our
equity investment in Metro, Inc. and included these amounts in "Equity in
earnings of Metro, Inc." on our Consolidated Statements of Operations. In
accordance with SFAS 115, for the 12 and 40 weeks ended December 1, 2007, we
recorded dividend income of $1.4 million and $3.9 million, respectively, based
on Metro, Inc.'s dividend declaration on April 17, 2007, August 8, 2007 and
September 25, 2007. These amounts are included in "Interest and dividend income"
on our Consolidated Statements of Operations. There was no such income for the
12 and 40 weeks ended December 2, 2006, as dividends received were recorded as a
reduction of the investment balance under the equity method of accounting.
Metro, Inc.'s summarized financial information, derived from its unaudited
second quarter ended March 17, 2007, unaudited fourth quarter ended September
30, 2006 and audited year ended September 30, 2006 financial statements, is as
follows (in millions):
12 Weeks Ended 13 Weeks Ended 53 Weeks Ended
March 17, 2007 Sept. 30, 2006 Sept. 30, 2006
-------------- -------------- --------------
Income statement:
Net sales $ 2,096.5 $ 2,370.1 $ 9,705.1
============== ============== ==============
Cost of sales and operating expenses $ 1,967.1 $ 2,216.4 $ 9,138.9
============== ============== ==============
Net income $ 55.0 $ 69.9 $ 224.4
============== ============== ==============
5. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND AVAILABLE-FOR-SALE SECURITIES
At December 1, 2007 and February 24, 2007, we had $542.1 million and $51.2
million, respectively, in restricted cash, of which $538.4 million and $47.6
million, respectively, was held in a money market fund, and can only be used as
collateral for our Letter of Credit Agreement that we entered into during fiscal
2005. The remaining amounts of $3.7 million and $3.6 million, respectively,
represented monies held in escrow for services which our Company is required to
perform in connection with the sale of our real estate properties.
10
The following is a summary of cash, cash equivalents, restricted cash and
available-for-sale securities at December 1, 2007 and February 24, 2007:
At December 1, 2007
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
--------- ---------- ---------- ---------
CLASSIFIED AS:
Cash $ 67,006 $ -- $ -- $ 67,006
Cash equivalents:
Money market funds 2,404 -- -- 2,404
--------- ---------- ---------- ---------
Total cash and cash equivalents 69,410 -- -- 69,410
--------- ---------- ---------- ---------
Restricted cash 542,109 -- -- 542,109
--------- ---------- ---------- ---------
Total cash, cash equivalents and restricted cash $ 611,519 $ -- $ -- $ 611,519
========= ========== ========== =========
At February 24, 2007
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
--------- ---------- ---------- ---------
CLASSIFIED AS:
Cash $ 81,137 $ -- $ -- $ 81,137
Cash equivalents:
Money market funds 5,057 -- -- 5,057
--------- ---------- ---------- ---------
Total cash and cash equivalents 86,194 -- -- 86,194
--------- ---------- ---------- ---------
Restricted cash 51,176 -- -- 51,176
Available-for-sale securities:
Corporate bonds 20,357 -- (22) 20,335
--------- ---------- ---------- ---------
Total cash, cash equivalents, restricted cash
and available-for-sale securities $ 157,727 $ -- $ (22) $ 157,705
========= ========== ========== =========
SECURITIES AVAILABLE-FOR-SALE:
Maturing within one year $ 20,357 $ 20,335
========= =========
Maturing greater than one year $ -- $ --
========= =========
The following table provides the breakdown of the investments with unrealized
losses at February 24, 2007:
February 24, 2007
-----------------------------------------------------------------------------------------------------
Less than 12 Months 12 Months or Longer Total
------------------------------- ------------------------------ ------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
-------------- ------------- ------------- ------------- ---------- --------------
Corporate bonds $ 20,335 $ (22) $ -- $ -- $ 20,335 $ (22)
Corporate bonds: Our unrealized losses on investments in corporate bonds were
caused by interest rate increases by the Federal Reserve. The contractual terms
of those investments did not permit the issuer to settle the security at a price
less than the amortized cost of the investment. We did not believe it was
probable that we would be unable to collect all amounts due according to the
contractual terms of these investments. Therefore, it was expected that the
debentures would not be settled at a price less than the amortized cost of the
investment. Because we had the ability and intent to hold those investments
until a recovery of fair value, which may be maturity, we did not consider those
investments to be other-than-temporarily impaired at February 24, 2007.
11
Gross realized gains on sales of investments were $103.6 million and $182.1
million for the 12 and 40 weeks ended December 1, 2007, respectively, and nil
and $0.05 million for the 40 weeks ended December 2, 2006, respectively.
6. VALUATION OF LONG-LIVED ASSETS
In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), we review the carrying values of our long-lived
assets for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. Such review
is primarily based upon groups of assets and the undiscounted estimated future
cash flows from such assets to determine if the carrying value of such assets is
recoverable from their respective cash flows. If such review indicates an
impairment exists, we measure such impairment on a discounted basis using a
probability-weighted approach and a 7 year U.S. Treasury risk-free rate.
During the 12 and 40 weeks ended December 1, 2007 we recorded impairment losses
on long-lived assets of $4.7 million and $57.8 million, respectively. During the
12 and 40 weeks ended December 2, 2006, we recorded impairment losses on
long-lived assets of $1.0 million and $4.6 million, respectively.
Impairments due to closure or conversion in the normal course of business
We review assets in stores planned for closure or conversion for impairment upon
determination that such assets will not be used for their intended useful life.
During the 12 and 40 weeks ended December 1, 2007, we recorded impairment losses
on property of $2.5 million and $3.6 million, respectively, related to stores
that were or will be closed or converted in the normal course of business, as
compared to $1.0 million and $3.6 million in impairment losses on property
related to stores that were closed or converted in the normal course of business
during the 12 and 40 weeks ended December 2, 2006, respectively. These amounts
were included in "Store operating, general and administrative expense" in our
Consolidated Statements of Operations.
Impairments related to our Asset Disposition Initiatives
During the 12 and 40 weeks ended December 2, 2006, we recorded impairment losses
on property of nil and $1.0 million, respectively, related to property
write-downs as a result of our asset disposition initiatives as discussed in
Note 8 - Asset Disposition Initiatives. These amounts were included in "Store
operating, general and administrative expense" in our Consolidated Statements of
Operations for the 12 and 40 weeks ended December 2, 2006. There were no such
amounts recorded for the 12 and 40 weeks ended December 1, 2007.
Impairments related to our discontinued operations
During the 12 and 40 weeks ended December 1, 2007, we recorded impairment losses
of $2.2 million and $54.2 million, respectively, related to our discontinued
operations as a result of our exit of the Greater New Orleans and Midwest
markets as discussed in Note 7 - Discontinued Operations. These amounts were
included in our Consolidated Statements of Operations under the caption "Loss on
disposal of discontinued operations, net of tax" for the 12 and 40 weeks ended
December 1, 2007. There were no such charges for the 12 and 40 weeks ended
December 2, 2006.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
12
7. DISCONTINUED OPERATIONS
On April 24, 2007, based upon unsatisfactory operating trends and the need to
devote resources to our expanding Northeast core business, our Company announced
negotiations for the sale of our non-core stores within our Midwest operations,
including inventory related to these stores. Sale transactions for these stores
have been completed. Further, our Company has ceased sales operations in all
stores as of July 7, 2007. In connection with the shutdown of these operations,
we recorded net occupancy costs of $1.8 million and $60.7 million during the 12
and 40 weeks ended December 1, 2007, respectively, for closed stores and
warehouses not sold. As we continue to negotiate lease terminations as well as
sublease some of these locations, these estimates may require adjustment in
future periods.
On May 30, 2007, our Company announced advanced negotiations for the sale of our
non-core stores located within the Greater New Orleans area, including inventory
related to these stores. Sale transactions for these stores have been completed.
Further, our Company has ceased sales operations in all stores as of November 1,
2007. In connection with the shutdown of these operations, we recorded net
occupancy costs of $1.6 million during the 12 and 40 weeks ended December 1,
2007.
In accordance with SFAS 144, the criteria necessary to classify these operations
as discontinued have been satisfied for the Midwest and the Greater New Orleans
area and as such, have been reclassified in our Consolidated Statements of
Operations for the 12 and 40 weeks ended December 1, 2007 and December 2, 2006.
In applying the provisions of SFAS 144, we estimated the assets' fair market
value based upon expected proceeds less costs to sell and recorded impairment
losses on property, plant and equipment for the 12 and 40 weeks ended December
1, 2007 of $2.2 million and $54.2 million, respectively. These amounts are
included in "Loss on disposal of discontinued businesses, net of tax" on our
Consolidated Statements of Operations.
During fiscal 2003, we adopted a formal plan to exit the New England and
Wisconsin markets through the sale and/or disposal of these assets. In February
2003, we announced the sale of a portion of our non-core assets, including nine
of our stores in northern New England and seven stores in Madison, Wisconsin. In
March 2003, we entered into an agreement to sell an additional eight stores in
northern New England.
Summarized below are the operating results for these discontinued businesses,
which are included in our Consolidated Statements of Operations, under the
caption "(Loss) income from operations of discontinued businesses, net of tax"
and "Gain (loss) on disposal of discontinued businesses, net of tax" for the 12
and 40 weeks ending December 1, 2007 and December 2, 2006.
13
12 weeks ended December 1, 2007
--------------------------------------------------------------------------------
Greater
New Midwest Midwest Midwest Northern
Orleans 2007 2005 2004 New England Kohl's Total
-------- -------- ------- ------- ----------- ------ --------
LOSS FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ 35,135 $ -- $ -- $ -- $ -- $ -- $ 35,135
Operating expenses (39,125) (8,883) (140) (160) -- (367) (48,675)
-------- -------- ------- ------- ----------- ------ --------
Loss from operations of
discontinued businesses, before tax (3,990) (8,883) (140) (160) -- (367) (13,540)
-------- -------- ------- ------- ----------- ------ --------
Tax benefit -- -- -- -- -- -- --
-------- -------- ------- ------- ----------- ------ --------
Loss from operations of discontinued
businesses, net of tax $ (3,990) $ (8,883) $ (140) $ (160) $ -- $ (367) $(13,540)
======== ======== ======= ======= =========== ====== ========
DISPOSAL RELATED COSTS INCLUDED
IN OPERATING EXPENSES ABOVE:
Severance and benefits $ (795) $ 55 $ -- $ -- $ -- $ -- $ (740)
Non-accruable closing costs (509) (2,897) -- -- -- -- (3,406)
Occupancy related costs (1,649) (1,792) 650 -- -- (209) (3,000)
Gain on lease termination -- 2,197 -- -- -- -- 2,197
Inventory related costs (1,191) (140) -- -- -- -- (1,331)
Lease termination costs -- (123) -- -- -- -- (123)
Post retirement curtailment change
in estimate -- (3,000) -- -- -- -- (3,000)
Interest accretion on present value
of future occupancy costs (204) (2,212) (790) (160) -- (158) (3,524)
-------- -------- ------- ------- ----------- ------ --------
Total disposal related costs $ (4,348) $ (7,912) $ (140) $ (160) $ -- $ (367) $(12,927)
======== ======== ======= ======= =========== ====== ========
LOSS ON DISPOSAL OF
DISCONTINUED OPERATIONS
Property impairments $ (1,960) $ (275) $ -- $ -- $ -- $ -- $ (2,235)
-------- -------- ------- ------- ----------- ------ --------
Loss on disposal of discontinued
business, before tax (1,960) (275) -- -- -- -- (2,235)
-------- -------- ------- ------- ----------- ------ --------
Tax benefit -- -- -- -- -- -- --
-------- -------- ------- ------- ----------- ------ --------
Loss on disposal of discontinued
operations, net of tax $ (1,960) $ (275) $ -- $ -- $ -- $ -- $ (2,235)
======== ======== ======= ======= =========== ====== ========
14
12 weeks ended December 2, 2006
----------------------------------------------------------------------------------
Greater Northern Eight
New Midwest Midwest Midwest New O'Clock
Orleans 2007 2005 2004 England Kohl's Coffee Total
-------- --------- ------- ------- -------- ------ ------- ---------
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ 90,720 $ 238,808 $ -- $ -- $ -- $ -- $ -- $ 329,528
Operating expenses (84,674) (242,474) (2,682) (169) 25 1,318 (41) (328,697)
-------- --------- ------- ------- -------- ------ ------- ---------
Income (loss) from operations of
discontinued businesses, before tax 6,046 (3,666) (2,682) (169) 25 1,318 (41) 831
-------- --------- ------- ------- -------- ------ ------- ---------
Tax (provision) benefit (1,310) 794 581 37 (5) (286) 9 (180)
-------- --------- ------- ------- -------- ------ ------- ---------
Income (loss) from operations of
discontinued businesses,
net of tax $ 4,736 $ (2,872) $(2,101) $ (132) $ 20 $1,032 $ (32) $ 651
======== ========= ======= ======= ======== ====== ======= =========
DISPOSAL RELATED COSTS INCLUDED
IN OPERATING EXPENSES ABOVE:
Severance and benefits $ -- $ -- $ (4) $ -- $ -- $ -- $ -- $ (4)
Non-accruable closing costs -- -- -- -- 25 42 (41) 26
Occupancy related costs 1,128 (108) (1,937) -- -- 970 -- 53
Gain on capital lease termination -- -- 55 -- -- -- -- 55
Proceeds on lease termination -- -- -- -- -- 394 -- 394
Interest accretion on present value
of future occupancy costs (236) (117) (796) (169) -- (88) -- (1,406)
-------- --------- ------- ------- -------- ------ ------- ---------
Total disposal related costs $ 892 $ (225) $(2,682) $ (169) $ 25 $1,318 $ (41) $ (882)
======== ========= ======= ======= ======== ====== ======= =========
GAIN ON DISPOSAL OF
DISCONTINUED OPERATIONS
Property impairments $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Gain on sale of fixed assets 5,641 -- -- -- -- -- -- 5,641
-------- --------- ------- ------- -------- ------ ------- ---------
Gain on disposal of discontinued
businesses, before tax 5,641 -- -- -- -- -- -- 5,641
-------- --------- ------- ------- -------- ------ ------- ---------
Tax benefit 2,158 -- -- -- -- -- -- 2,158
-------- --------- ------- ------- -------- ------ ------- ---------
Gain on disposal of
discontinued businesses,
net of tax $ 7,799 $ -- $ -- $ -- $ -- $ -- $ -- $ 7,799
======== ========= ======= ======= ======== ====== ======= =========
15
40 weeks ended December 1, 2007
----------------------------------------------------------------------------------------
Greater
New Midwest Midwest Midwest Northern
Orleans 2007 2005 2004 New England Kohl's Total
--------- --------- --------- --------- ----------- --------- ---------
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ 230,156 $ 332,498 $ -- $ -- $ -- $ -- $ 562,654
Operating expenses (231,682) (512,748) 4,426 (461) -- (1,856) (742,321)
--------- --------- --------- --------- ----------- --------- ---------
(Loss) income from operations of
discontinued businesses, before tax (1,526) (180,250) 4,426 (461) -- (1,856) (179,667)
--------- --------- --------- --------- ----------- --------- ---------
Tax benefit -- -- -- -- -- -- --
--------- --------- --------- --------- ----------- --------- ---------
(Loss) income from operations of
discontinued businesses,
net of tax $ (1,526) $(180,250) $ 4,426 $ (461) $ -- $ (1,856) $(179,667)
========= ========= ========= ========= =========== ========= =========
DISPOSAL RELATED COSTS INCLUDED
IN OPERATING EXPENSES ABOVE:
Severance and benefits $ (1,198) $ (23,446) $ -- $ -- $ -- $ -- $ (24,644)
Non-accruable closing costs (529) (6,396) -- -- -- -- (6,925)
Occupancy related costs (2,387) (60,705) 7,117 80 -- (1,441) (57,336)
Gain on lease termination -- 2,197 -- -- -- -- 2,197
Inventory related costs (1,191) (3,226) -- -- -- -- (4,417)
Lease termination costs (822) (753) -- -- -- -- (1,575)
Pension withdrawal costs -- (57,007) -- -- -- -- (57,007)
Interest accretion on present value
of future occupancy costs (680) (3,953) (2,691) (541) -- (415) (8,280)
--------- --------- --------- --------- ------------ --------- ---------
Total disposal related costs $ (6,807) $(153,289) $ 4,426 $ (461) $ -- $ (1,856) $(157,987)
========= ========= ========= ========= =========== ========= =========
(LOSS) GAIN ON DISPOSAL OF
DISCONTINUED OPERATIONS
Property impairments $ (16,856) $ (37,393) $ -- $ -- $ -- $ -- $ (54,249)
Gain on sale of fixed assets 79 3,131 -- -- -- -- 3,210
--------- --------- --------- --------- ----------- --------- ---------
Loss on disposal of discontinued
business, before tax (16,777) (34,262) -- -- -- -- (51,039)
--------- --------- --------- --------- ----------- --------- ---------
Tax benefit -- -- -- -- -- -- --
--------- --------- --------- --------- ----------- --------- ---------
Loss on disposal of discontinued
operations, net of tax $ (16,777) $ (34,262) $ -- $ -- $ -- $ -- $ (51,039)
========= ========= ========= ========= =========== ========= =========
16
40 weeks ended December 2, 2006
----------------------------------------------------------------------------------------------
Greater Northern Eight
New Midwest Midwest Midwest New O'Clock
Orleans 2007 2005 2004 England Kohl's Coffee Total
---------- ---------- ---------- --------- -------- ------ ------- ------------
INCOME (LOSS) FROM OPERATIONS
OF DISCONTINUED BUSINESSES
Sales $ 317,947 $ 820,772 $ -- $ -- $ -- $ -- $ -- $ 1,138,719
Operating expenses (302,650) (829,373) (7,594) 2,447 -- 657 (41) (1,136,554)
---------- ---------- ---------- --------- -------- ------ ------- ------------
Income (loss) from operations
of discontinued businesses,
before tax 15,297 (8,601) (7,594) 2,447 -- 657 (41) 2,165
---------- ---------- ---------- --------- -------- ------ ------- ------------
Tax benefit (provision) 4,190 (2,356) (2,080) 670 -- 180 (11) 593
---------- ---------- ---------- --------- -------- ------ ------- ------------
Income (loss) from operations
of discontinued businesses,
net of tax $ 19,487 $ (10,957) $ (9,674) $ 3,117 $ -- $ 837 $ (52) $ 2,758
========== ========== ========== ========= ======== ====== ======= ============
DISPOSAL RELATED COSTS
INCLUDED IN OPERATING
EXPENSES ABOVE:
Severance and benefits $ -- $ -- $ 16 $ -- $ -- $ 146 $ -- $ 162
Non-accruable closing costs (224) -- (93) -- -- -- (41) (358)
Occupancy related costs 3,014 (343) (4,794) 3,021 -- 429 -- 1,327
Inventory costs 66 -- -- -- -- -- -- 66
Gain on capital lease
termination -- -- 55 -- -- -- -- 55
Proceeds on lease termination -- -- -- -- -- 394 -- 394
Interest accretion on present
value of future occupancy
costs (899) (401) (2,778) (574) -- (312) -- (4,964)
---------- ---------- ---------- --------- -------- ------ ------- ------------
Total disposal related costs $ 1,957 $ (744) $ (7,594) $ 2,447 $ -- $ 657 $ (41) $ (3,318)
========== ========== ========== ========= ======== ====== ======= ============
GAIN ON DISPOSAL OF
DISCONTINUED OPERATIONS
Property impairments $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Gain (loss) on sale of fixed
assets 5,622 (86) (46) -- -- -- -- 5,490
---------- ---------- ---------- --------- -------- ------ ------- ------------
Gain (loss) on disposal of
discontinued businesses,
before tax 5,622 (86) (46) -- -- -- -- 5,490
---------- ---------- ---------- --------- -------- ------ ------- ------------
Tax benefit (provision) 2,150 (33) (17) -- -- -- -- 2,100
---------- ---------- ---------- --------- -------- ------ ------- ------------
Gain (loss) on disposal of
discontinued businesses,
net of tax $ 7,772 $ (119) $ (63) $ -- $ -- $ -- $ -- $ 7,590
========== ========== ========== ========= ======== ====== ======= ============
GREATER NEW ORLEANS
On May 30, 2007, our Company announced advanced negotiations for the sale of our
non-core stores located within the Greater New Orleans area, including inventory
related to these stores. Sale transactions for these stores have been completed.
During the 12 and 40 weeks ended December 1, 2007, we incurred pre-tax disposal
related costs for our operations in this region of $4.3 million and $6.8
million, respectively, related to severance and benefits, inventory costs,
occupancy related costs and lease termination costs. During the 12 and 40 weeks
ended December 2, 2006, we recorded pre-tax reversals of occupancy related costs
for our operations in this region of $1.1 million and $3.0 million,
respectively. These amounts were included in "(Loss) income from operations of
discontinued businesses, net of tax" on our Consolidated Statements of
Operations. Additionally, we incurred pre-tax costs for property impairments of
$2.0 million and $16.9 million offset by a pre-tax gain on the sale of fixed
assets of nil and $0.1 million for the 12 and 40 weeks ended December 1, 2007,
respectively. We also recorded a pre-tax gain on the sale of fixed assets of
$5.6 million for the 12 and 40 weeks ended December 2, 2006, which was included
in "(Gain) loss on disposal of discontinued operations, net of tax" on our
Consolidated Statements of Operations.
17
The following table summarizes the activity to date related to the charges
recorded for the sale or closing of these facilities:
Severance
and
Occupancy Benefits Total
--------- --------- -------
Original charge (1) $ 5,056 $ 403 $ 5,459
Additions (2) 14 795 809
Utilization (3) (180) (891) (1,071)
------- ------- -------
Balance at December 1, 2007 $ 4,890 $ 307 $ 5,197
======= ======= =======
(1) The original charge to occupancy of $5.1 million during the 40 weeks
ended December 1, 2007 represents charges related to closures of 4 stores
in conjunction with our decision to sell stores in the Greater New Orleans
area. The original charge to severance and benefits during the 40 weeks
ended December 1, 2007 of $0.4 million related to individual severings.
(2) The additions to occupancy during the 40 weeks ended December 1, 2007
represents interest accretion on future occupancy costs which were recorded
at present value at the time of the original charge. The additions to
severance and benefits during the 40 weeks ended December 1, 2007 relates
to additional individual severings and retention incentives.
(3) Occupancy utilization represents payments made during those periods for
rent. Severance and benefits utilization represents payments made to
terminated employees during the period.
We paid $0.2 million of the total occupancy charges from the time of the
original charge through December 1, 2007 which was for rent. The remaining
occupancy liability of $4.9 million relates to expected future payments under
long term leases and is expected to be paid out in full by 2010. We paid $0.9
million of the total net severance and benefits charges from the time of the
original charges through December 1, 2007. The remaining severance liability of
$0.3 million at December 1, 2007 relates to expected future payments for
severance and benefits payments to individual employees which will be fully paid
out by 2008.
As of December 1, 2007 approximately $0.3 million of the liability was included
in "Accrued salaries, wages and benefits," $2.1 million was included in "Other
accruals" and $2.8 million was included in "Other non-current liabilities" on
our Consolidated Balance Sheets.
We have evaluated the reserve balances as of December 1, 2007 of $5.2 million
based on current information and have concluded that it is adequate to cover
expected future costs. We will continue to monitor the status of the subsidized
properties, and severance and benefits, and adjustments to the reserve balances
may be recorded in the future, if necessary.
MIDWEST 2007
On April 24, 2007, based upon unsatisfactory operating trends and the need to
devote resources to our expanding Northeast core business, our Company announced
negotiations for the sale of our non-core stores within our Midwest operations,
including inventory related to these stores.
During the 12 and 40 weeks ended December 1, 2007, we incurred pre-tax disposal
related costs for our operations in this region of $7.9 million and $153.3
million, respectively, primarily related to pension withdrawal costs, severance,
inventory costs and occupancy related costs. During the 12 and 40 weeks ended
December 2, 2006, we incurred pre-tax disposal related costs for our operations
in this region of $0.2 million and $0.7 million, respectively, related to
occupancy costs. These amounts were included in "(Loss) income from operations
of discontinued businesses, net of tax" on our Consolidated Statements of
Operations. Additionally, we incurred pre-tax costs for property impairments of
$0.3 million and $37.4 million offset by a pre-tax gain on the sale of fixed
assets of nil and $3.1 million for the 12 and 40 weeks
18
ended December 1, 2007, respectively. For the 12 and 40 weeks ended December 2,
2006, we recorded a pre-tax loss on the sale of fixed assets of nil and $0.1
million, respectively, which were included in "Gain (loss) on disposal of
discontinued operations, net of tax" on our Consolidated Statements of
Operations.
The following table summarizes the activity to date related to the charges
recorded for the sale or closing of these facilities:
Severance
and
Occupancy Benefits Total
--------- --------- ---------
Original charge (1) $ 68,440 $ 66,508 $ 134,948
Additions (2) 3,998 14,000 17,998
Utilization (3) (13,589) (18,986) (32,575)
Adjustments (4) 1,141 (55) 1,086
--------- --------- ---------
Balance at
December 1, 2007 $ 59,990 $ 61,467 $ 121,457
========= ========= =========
(1) The original charge to occupancy of $68.4 million during the 40 weeks ended
December 1, 2007 represents charges related to closures of 33 stores in
conjunction with our decision to close stores in the Midwest. The original
charge to severance and benefits during the 40 weeks ended December 1, 2007
of $66.5 million related to (i.) individual severings and retention
incentives that were accrued as earned of $23.5 million as a result of the
sale or closing of these facilities and (ii.) costs for future obligations
for early withdrawal from multi-employer union pension plans of $43.0
million.
(2) The additions to occupancy during the 40 weeks ended December 1, 2007
represents interest accretion on future occupancy costs which were recorded
at present value at the time of the original charge and $0.3 million for
one additional store that was not sold. The additions to severance and
benefits during the 40 weeks ended December 1, 2007 relates to additional
costs for future obligations for early withdrawal from multi-employer union
pension plans.
(3) Occupancy utilization represents payments made during those periods for
costs such as rent, common area maintenance and real estate taxes.
Severance and benefits utilization represents payments made to terminated
employees during the period.
(4) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During the 40 weeks ended December 1, 2007,
we recorded adjustments for additional vacancy related costs for our
properties of $1.1 million due to changes in our estimation of such future
costs and a reversal of previously accrued severance payments of $0.1
million that were no longer required to be paid.
We paid $13.6 million of the total occupancy charges from the time of the
original charge through December 1, 2007 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. The remaining occupancy liability of $60.0 million relates to
expected future payments under long term leases and is expected to be paid out
in full by 2024. We paid $19.0 million of the total net severance and benefits
charges from the time of the original charges through December 1, 2007. The
remaining severance and benefits liability of $61.5 million relates to expected
future payments for early withdrawals from multi-employer union pension plans
and expected future payments for severance and benefits payments to individual
employees which will be fully paid out by 2026.
As of December 1, 2007 approximately $4.5 million of the liability was included
in "Accrued salaries, wages and benefits," $21.8 million was included in "Other
accruals" and $95.2 million was included in "Other non-current liabilities" on
our Consolidated Balance Sheets.
We have evaluated the reserve balances as of December 1, 2007 of $121.5 million
based on current information and have concluded that it is adequate to cover
expected future costs. We will continue to monitor the status of the vacant
properties, the severance and benefits, and pension withdrawal liabilities, and
adjustments to the reserve balances may be recorded in the future, if necessary.
19
MIDWEST 2005
During the first quarter of fiscal 2005, we announced plans for a major
strategic restructuring that would focus future effort and investment on our
core operations in the Northeastern United States. Thus, we initiated efforts to
close stores in the Midwest. This planned store closure included the closing of
a total of 35 stores, all of which have been closed as of December 1, 2007.
During the 12 and 40 weeks ended December 1, 2007, we recorded pre-tax reversals
of occupancy related costs for our operations in this region of $0.7 million and
$7.1 million, respectively. During the 12 and 40 weeks ended December 2, 2006,
we incurred pre-tax disposal related costs for our operations in this region of
$2.7 million and $7.6 million, respectively, primarily related to occupancy
costs. These amounts were included in "(Loss) income from operations of
discontinued businesses, net of tax" on our Consolidated Statements of
Operations. Additionally, we recorded a pre-tax loss on the sale of fixed assets
of nil and $0.1 million, respectively, for the 12 and 40 weeks ended December 2,
2006, which were included in "Gain (loss) on disposal of discontinued
operations, net of tax" on our Consolidated Statements of Operations. There were
no such similar costs recorded for the 12 and 40 weeks ended December 1, 2007.
The following table summarizes the activity to date related to the charges
recorded for these store closures:
Severance
and
Occupancy Benefits Total
---------- ---------- ----------
Original charge (1) $ 14,766 $ 1,337 $ 16,103
Additions (2) 75,259 1,373 76,632
Utilization (3) (9,538) (2,439) (11,977)
Adjustment (4) 9,153 (44) 9,109
---------- ---------- ----------
Balance at February 25, 2006 $ 89,640 $ 227 $ 89,867
Additions (2) 3,567 -- 3,567
Utilization (3) (14,065) (211) (14,276)
Adjustment (4) 3,969 (16) 3,953
---------- ---------- ----------
Balance at February 24, 2007 $ 83,111 $ -- $ 83,111
Additions (2) 2,691 -- 2,691
Utilization (3) (9,804) -- (9,804)
Adjustment (4) (7,117) -- (7,117)
---------- ---------- ----------
Balance at December 1, 2007 $ 68,881 $ -- $ 68,881
========== ========== ==========
(1) The original charge to occupancy during fiscal 2005 represents charges
related to closures of the first 8 stores in conjunction with our decision
to close stores in the Midwest of $14.8 million. The original charge to
severance during fiscal 2005 of $1.3 million related to individual
severings as a result of these store closures.
(2) The additions to occupancy during fiscal 2005 represent charges related to
the closures of an additional 27 stores in the amount of $73.7 million and
interest accretion on future occupancy costs which were recorded at
present value at the time of the original charge in the amount of $1.6
million. The additions to store occupancy during fiscal 2006 and the 40
weeks ended December 1, 2007 represent the interest accretion on future
occupancy costs which were recorded at present value at the time of the
original charge. The additional charge to severance during fiscal 2005 of
$1.3 million related to individual severings as a result of the additional
stores identified for closures.
(3) Occupancy utilization represents payments made during those periods for
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance utilization represents payments made to
terminated employees during the period.
(4) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2005, we recorded an
increase of $9.2 million in occupancy accruals due to changes in our
original estimate of our future vacancy obligations for closed stores. We
also
20
recorded a decrease of $0.05 million for the reversal of previously
accrued severance and benefits due to changes in individual severings and
associated benefit costs. During fiscal 2006, we recorded adjustments for
additional vacancy related costs for our properties of $4.0 million due to
changes in our estimation of such future costs and changes to our estimate
to terminate certain leases, partially offset by the favorable result of
terminating a lease on one property. We also recorded a decrease of $0.02
million for the reversal of previously accrued severance and benefits due
to changes in individual severings and associated benefit costs. During
the 40 weeks ended December 1, 2007, we recorded adjustments for a
reduction in vacancy related costs for our properties of $7.1 million due
to (i.) changes in our estimation of such future costs of $6.4 million and
(ii.) a new sublease agreement for one property of $0.7 million.
We paid $33.4 million of the total occupancy charges from the time of the
original charge through December 1, 2007 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. The remaining occupancy liability of $68.9 million relates to
expected future payments under long term leases and is expected to be paid out
in full by 2022. We paid $2.7 million of the total net severance charges from
the time of the original charges through December 1, 2007, which resulted from
the termination of approximately 125 employees. The severance liability has been
fully utilized as of December 1, 2007 and no additional future payments for
severance and benefits to individual employees will be paid out. None of these
stores were open during either of the 40 weeks ended December 1, 2007 and
December 2, 2006.
At December 1, 2007 and February 24, 2007, approximately $11.0 million and $22.4
million, respectively, of the liability was included in "Other accruals" and
$57.9 million and $60.7 million, respectively, was included in "Other
non-current liabilities" on our Consolidated Balance Sheets.
We have evaluated the reserve balances as of December 1, 2007 of $68.9 million
based on current information and have concluded that it is adequate to cover
expected future costs. We will continue to monitor the status of the vacant
properties and adjustments to the reserve balances may be recorded in the
future, if necessary.
MIDWEST 2004
During the 12 and 40 weeks ended December 1, 2007, we incurred pre-tax disposal
related costs for our operations in this region of $0.2 million and $0.5
million, respectively, related to occupancy costs. During the 12 weeks ended
December 2, 2006, we incurred pre-tax disposal related costs for our operations
in this region of $0.2 million and we recorded pre-tax reversals of occupancy
related costs of $3.0 million during the 40 weeks ended December 2, 2006. These
amounts were included in "(Loss) income from operations of discontinued
businesses, net of tax" on our Consolidated Statements of Operations.
21
The following table summarizes the activity related to this phase of the
initiative over the last three fiscal years:
Severance
and
Occupancy Benefits Total
---------- ---------- ----------
Balance at February 28, 2004 $ 19,962 $ 4,819 $ 24,781
Addition (1) 687 -- 687
Utilization (2) (4,747) (4,813) (9,560)
---------- ---------- ----------
Balance at February 26, 2005 $ 15,902 $ 6 $ 15,908
Addition (1) 710 -- 710
Utilization (2) (2,738) (6) (2,744)
Adjustment (3) 4,376 -- 4,376
---------- ---------- ----------
Balance at February 25, 2006 $ 18,250 $ -- $ 18,250
Addition (1) 741 -- 741
Utilization (2) (1,656) -- (1,656)
Adjustment (3) (3,021) -- (3,021)
---------- ---------- ----------
Balance at February 24, 2007 $ 14,314 $ -- $ 14,314
Addition (1) 541 -- 541
Utilization (2) (841) -- (841)
Adjustment (3) (80) -- (80)
---------- ---------- ----------
Balance at December 1, 2007 $ 13,934 $ -- $ 13,934
========== ========== ==========
(1) The additions to store occupancy represent the interest accretion on
future occupancy costs which were recorded at present value at the time of
the original charge.
(2) Occupancy utilization represents payments made during those periods for
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance utilization represents payments made to
terminated employees during the period.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2005, we recorded an
increase of $4.4 million in occupancy accruals due to changes in our
original estimate of when we would terminate certain leases, obtain
sublease rental income related to such leases and changes in our original
estimate of our future vacancy obligations for closed stores. During
fiscal 2006, we recorded adjustments for a reduction in vacancy related
costs for our properties of $3.0 million due to changes in our estimation
of such future costs. During the 40 weeks ended December 1, 2007, we
recorded adjustments for a reduction in vacancy related costs for our
properties of $0.1 million due to changes in our estimation of such future
costs.
We paid $11.1 million of the total occupancy charges from the time of the
original charge through December 1, 2007 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. The remaining occupancy liability of $13.9 million relates to
expected future payments under long term leases and is expected to be paid out
in full by 2022. We paid $8.9 million of the total net severance charges from
the time of the original charges through December 1, 2007, which resulted from
the termination of approximately 300 employees. The severance liability has been
fully utilized and no additional future payments for severance and benefits to
individual employees will be paid out. None of these stores were open during
either of the 12 and 40 weeks ended December 1, 2007 or December 2, 2006.
At December 1, 2007 and February 24, 2007, approximately $1.3 million and $1.3
million, respectively, of the liability was included in "Other accruals" and
$12.6 million and $13.0 million, respectively, was included in "Other
non-current liabilities" on our Consolidated Balance Sheets.
We have evaluated the reserve balances as of December 1, 2007 of $13.9 million
based on current information and have concluded that it is adequate to cover
expected future costs. We will continue to monitor the status of the vacant
properties and adjustments to the reserve balances may be recorded in the
future, if necessary.
22
NORTHERN NEW ENGLAND
During the 12 and 40 weeks ended December 2, 2006, we recorded pre-tax reversals
of non-accruable closing costs in this region subsequent to the sale of these
stores of $0.03 million and nil, respectively, primarily related to adjustments
as a result of changes in estimates. These amounts were included in "(Loss)
income from operations of discontinued businesses, net of tax" on our
Consolidated Statements of Operations for the 12 and 40 weeks ended December 2,
2006. There were no such similar costs recorded for the 12 and 40 weeks ended
December 1, 2007
KOHL'S MARKET
During the 12 and 40 weeks ended December 1, 2007, we recorded costs of $0.4
million and $1.9 million, respectively, due to interest accretion on future
occupancy payments that were recorded at present value at the time of the
original charge and adjustments to occupancy related costs as a result of
changes in estimates. During the 12 and 40 weeks ended December 2, 2006, we
recorded gains of $1.3 million and $0.7 million, respectively, primarily due to
favorable results of terminating leases at certain locations and adjustments as
a result of changes in estimates partially offset by interest accretion on
future occupancy payments that were recorded at present value at the time of the
original charge. These amounts were included in "(Loss) income from operations
of discontinued businesses, net of tax" on our Consolidated Statements of
Operations for the 12 and 40 weeks ended December 1, 2007 and December 2, 2006.
The following table summarizes the reserve activity related to the exit of the
Kohl's market over the last three fiscal years:
Severance and Fixed
Occupancy Benefits Assets Total
-------------- -------------- -------------- --------------
Balance at February 28, 2004 $ 19,039 $ 4,834 $ -- $ 23,873
Additions (1) 688 52 602 1,342
Utilization (2) (1,918) (2,201) (602) (4,721)
Adjustments (3) (354) -- -- (354)
-------------- -------------- -------------- --------------
Balance at February 26, 2005 $ 17,455 $ 2,685 $ -- $ 20,140
Additions (1) 562 44 -- 606
Utilization (2) (3,235) (2,128) -- (5,363)
Adjustments (3) (4,299) 582 -- (3,717)
-------------- -------------- -------------- --------------
Balance at February 25, 2006 $ 10,483 $ 1,183 $ -- $ 11,666
Additions (1) 385 4 -- 389
Utilization (2) (2,504) (1,041) -- (3,545)
Adjustments (3) (416) (146) -- (562)
-------------- -------------- -------------- --------------
Balance at February 24, 2007 $ 7,948 $ -- $ -- $ 7,948
Additions (1) 415 -- -- 415
Utilization (2) (1,504) -- -- (1,504)
Adjustments (3) 1,441 -- -- 1,441
-------------- -------------- -------------- --------------
Balance at December 1, 2007 $ 8,300 $ -- $ -- $ 8,300
============== ============== ============== ==============
(1) The fiscal 2004, fiscal 2005, fiscal 2006 and the 40 weeks ended December
1, 2007 additions to occupancy and severance and benefits represent the
interest accretion on future occupancy costs and future obligations for
early withdrawal from multi-employer union pension plans which were
recorded at present value at the time of the original charge. In fiscal
2004, the addition to fixed assets represents additional impairment losses
recorded as a result of originally estimated proceeds on the disposal of
these assets not being achieved.
(2) Occupancy utilization represents vacancy related payments for closed
locations such as rent, common area maintenance, real estate taxes and
lease termination payments. Severance and benefits utilization represents
payments made to terminated employees during the period and payments for
pension withdrawal.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2004, we recorded a reversal
of previously accrued occupancy related costs due to favorable results of
terminating leases. During fiscal 2005, we recorded adjustments
23
relating to (i.) a reversal of previously accrued occupancy costs of $3.7
million due to favorable results of terminating the Kohl's warehouse lease
and (ii.) the reclassification of $0.6 million between the liabilities for
occupancy and severance and benefits to properly state their respective
ending balances at February 25, 2006. During fiscal 2006, we recorded
adjustments for (i.) a reduction in vacancy related costs for our
properties due to favorable results of terminating leases at certain
locations of $0.7 million partially offset by changes in our estimation of
such future costs of $0.3 million and (ii.) a reversal of previously
accrued pension withdrawal payments of $0.1 million that were no longer
required to be paid. During the 40 weeks ended December 1, 2007, we
recorded adjustments for additional vacancy related costs for our
properties of $1.4 million due to changes in our estimation of such future
costs.
We paid $14.5 million of the total occupancy charges from the time of the
original charge through December 1, 2007 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. The remaining occupancy liability of $8.3 million relates to
expected future payments under long term leases and is expected to be paid out
in full by 2020.
We paid $13.6 million of the total original severance and benefits charges from
the time of the original charges through December 1, 2007, which resulted from
the termination of approximately 2,000 employees. At December 1, 2007, there are
no future obligations for severance and benefits.
At December 1, 2007 and February 24, 2007, $1.9 million and $2.3 million,
respectively, of the Kohl's exit reserves was included in "Other accruals" and
$6.4 million and $5.6 million, respectively, was included in "Other non-current
liabilities" on our Consolidated Balance Sheets.
We have evaluated the liability balance of $8.3 million as of December 1, 2007
based upon current available information and have concluded that it is adequate.
We will continue to monitor the status of the vacant properties and adjustments
to the reserve balance may be recorded in the future, if necessary.
24
8. ASSET DISPOSITION INITIATIVES
Presented below is a reconciliation of the charges recorded on our Consolidated
Balance Sheets, Consolidated Statements of Operations and Consolidated
Statements of Cash Flows for the 12 and 40 weeks ended December 1, 2007 and
December 2, 2006. Present value ("PV") interest represents interest accretion on
future occupancy costs which were recorded at present value at the time of the
original charge. Non-accruable items represent charges related to the
restructuring that are required to be expensed as incurred in accordance with
SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities".
12 weeks ended December 1, 2007
-------------------------------------------------------------------------------------------------------------
Project Great Renewal 2001 Asset Disposition Distribution 2005 Totals
--------------------- ----------------------- --------------------------- -------------------------------
NE* MW* Total NE GNO* Total NE MW GNO Total NE MW GNO Total
------ ------ ----- ----- ----- ----- ----- ------ ----- ------- ---- ----- ------- ------
Balance Sheet Accruals
Vacancy $ - $ - $ - $ - $ - $ - $ 119 $ - $ - $ 119 $119 $ - $ - $ 119
PV Interest 95 17 112 93 169 262 12 - 3 15 200 17 172 389
Severance - - - - - - 81 - - 81 81 - - 81
------ ------ ------- ------ ----- ----- ------ ------ ----- ------ ------ ----- ------ ------
Total accrued to
balance sheet 95 17 112 93 169 262 212 - 3 215 400 17 172 589
------ ------ ------- ------ ----- ----- ------ ------ ----- ------ ------ ----- ------ -------
Non-accruable items
recorded on Statements
of Operations
Closing costs - - - - - - 78 - - 78 78 - - 78
------ ------ ------- ----- ----- ----- ------ ------ ----- ------ ------ ----- -------- -------
Total non-accruable
items - - - - - - 78 - - 78 78 - - 78
------ ------ ------- ------ ----- ----- ------ ------ ----- ------ ------ ----- -------- -------
Less PV
interest (95) (17) (112) (93) (169) (262) (12) - (3) (15) (200) (17) (172) (389)
------ ----- ------ ------ ----- ------ ------ ----- ------ ------ -------- ------ -------- -------
(389)
Total amount recorded
on Statements of
Operations excluding
PV interest $ - $ - $ - $ - $ - $ - $ 278 $ - $ - $ 278 $ 278 $ - $ - $ 278
====== ====== ====== ===== ===== ===== ====== ===== ===== ====== ====== ====== ====== ======
*The headings in the tables included in Note 8 - Asset Disposition Initiatives
have been indexed with the following abbreviations: Northeast (NE), Midwest (MW)
and Greater New Orleans (GNO).
25
12 weeks ended December 2, 2006
----------------------------------------------------------------------------------------------------------
Project Great Renewal 2001 Asset Disposition Distribution 2005 Totals
----------------------- ---------------------- ----------------------- ----------------------------
NE MW Total NE GNO Total NE MW GNO Total NE MW GNO Total
------- ----- ------- ----- ------ ----- ------ --- --- ----- ------- ---- ----- -------
BALANCE SHEET ACCRUALS
Vacancy $(3,796) $ -- $(3,796) $ 49 $ -- $ 49 $ 604 $ -- $ -- $604 $(3,143) $ -- $ -- $(3,143)
PV Interest 173 24 197 118 182 300 7 32 17 56 298 56 199 553
Severance -- -- -- -- -- -- 32 -- -- 32 32 -- -- 32
------- ----- ------- ----- ----- ----- ----- ---- ---- ---- ------- ---- ----- -------
Total accrued to
balance
sheet (3,623) 24 (3,599) 167 182 349 643 32 17 692 (2,813) 56 199 (2,558)
------- ----- ------- ----- ----- ----- ----- ---- ---- ---- ------- ---- ----- -------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Loss on sale of property -- -- -- -- -- -- 24 -- -- 24 24 -- -- 24
Closing costs (5) -- (5) -- -- -- 86 -- -- 86 81 -- -- 81
------- ----- ------- ----- ----- ----- ----- ---- ---- ---- ------- ---- ----- -------
Total non-accruable
items (5) -- (5) -- -- -- 110 -- -- 110 105 -- -- 105
------- ----- ------- ----- ----- ----- ----- ---- ---- ---- ------- ---- ----- -------
Less PV interest (173) (24) (197) (118) (182) (300) (7) (32) (17) (56) (298) (56) (199) (553)
------- ----- ------- ----- ----- ----- ----- ---- ---- ---- ------- ---- ----- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS EXCLUDING
PV INTEREST $(3,801) $ -- $(3,801) $ 49 $ -- $ 49 $ 746 $ -- $ -- $746 $(3,006) $ -- $ -- $(3,006)
======= ===== ======= ===== ===== ===== ===== ==== ==== ==== ======= ==== ===== ======
26
40 weeks ended December 1, 2007
------------------------------------------------------------------------------------------------------------
Project Great Renewal 2001 Asset Disposition Distribution 2005 Totals
----------------------- ---------------------- --------------------------- -----------------------------
NE MW Total NE GNO Total NE MW GNO Total NE MW GNO Total
------- ----- ------- ----- ------ ----- ------ ---- --- ----- ------- ---- ----- -------
Balance Sheet Accruals
Vacancy $(351) $ - $(351) $ 10 $ - $ 10 $(838) $(2,631) $ - $(3,469) $(1,179) $(2,631) $ - $(3,810)
PV Interest 342 63 405 312 580 892 40 69 22 131 694 132 602 1,428
Severance - - - - - - 1,592 - - 1,592 1,592 - - 1,592
Pension withdrawal
costs - - - - - - 726 - - 726 726 - - 726
------ ------ ------- ------ ----- ---- ------ ------- ----- ------ ------ ------- ----- -------
Total accrued to
balance sheet (9) 63 54 322 580 902 1,520 (2,562) 22 (1,020) 1,833 (2,499) 602 (64)
------ ------ ------ ------ ----- ---- ----- ------- ----- ------ ------ ------- ----- -------
Non-accruable items
recorded on Statements
of Operations
Proceeds from lease
termination (1,100) - (1,100) - - - - - - - (1,100) - - (1,100)
Gain on sale of property - - - - - - (20,824) - - (20,824) (20,824) - - (20,824)
Closing costs - - - - - - 1,542 - - 1,542 1,542 - - 1,542
------ ------ ------- ------ ------- ---- ------ ----- ----- ------ ------- -------- ------ -------
Total non-accruable
items (1,100) - (1,100) - - - (19,282) - - (19,282) (20,382) - - (20,382)
------- ------ ------ ------ ------- --- ------- ----- ----- ------ ------- -------- ------ ------
Less PV interest (342) (63) (405) (312) (580) (892) (40) (69) (22) (131) (694) (132)(602) (1,428)
------- ------- ------ ------- ----- ------ ------- ----- ------ ------ -------- ------- ------ ------
Total amount recorded
on Statements of
Operations excluding
PV interest (1,451) - (1,451) 10 - 10 (17,802)(2,631) - (20,433) (19,243) (2,631) - (21,874)
======= ===== ======= ======= ===== ==== ======= ===== ==== ====== ====== ===== ==== ======
Less closing costs - - - - - - (1,542) - - (1,542) (1,542) - - (1,542)
Less vacancy costs
included in
discontinued
operations - - - - - - - 2,631 - 2,631 - 2,631 - 2,631
------ ------ ------ ------ ----- ---- ------ ------ ----- ------- ------- ------ ----- ------
Total amount recorded
in Statements of
Cash Flows $(1,451) $ - $(1,451) $ 10 $ - $ 10 $(19,344) $ - $ - $(19,344)$(20,785) $ - $ - $(20,785)
======== ==== ======= ====== ===== ===== ========= ===== ==== ======== ======== ===== === ========
27
40 weeks ended December 2, 2006
----------------------------------------------------------------------------------------------------
Project Great Renewal 2001 Asset Disposition Distribution 2005 Totals
----------------------- ---------------------- ------------------------ -----------------------------
NE MW Total NE GNO Total NE MW GNO Total NE MW GNO Total
------- ----- ------- ----- ------ ----- ------ ---- --- ----- ------- ---- ----- --------
Balance Sheet Accruals
Vacancy $(5,429) $ - (5,429) $4,482 $ - $4,482 $2,348 $ - $ - $2,348 $1,401 $ - $ - $ 1,401
PV Interest 666 90 756 520 630 1,150 14 110 63 187 1,200 200 693 2,093
Severance (95) - (95) - - - 167 - - 167 72 - - 72
------ ------ ------- ------ --- ------ ----- ----- ---- ----- ------ ----- ---- --------
Total accrued to
balance
sheet (4,858) 90 (4,768) 5,002 630 5,632 2,529 110 63 2,702 2,673 200 693 3,566
------ ----- ------- ------ --- ------ ----- ---- ---- ----- ------ ----- ---- -------
Non-accruable items
recorded on Statements
of Operations
Property writeoffs - - - - - - 1,049 - 1,049 1,049 - - 1,049
Inventory related costs - - - - - - (505) - (66) (571) (505) - (66) (571)
Loss (gain) on
sale of property - - - - - - 31 - (11) 20 31 - (11) 20
Closing costs (5) - (5) - - - 1,939 - 222 2,161 1,934 - 222 2,156
------ ------ ----- ------ ----- ----- ----- ----- --- ----- ----- ---- ---- -----
Total non-accruable
items (5) - (5) - - - 2,514 - 145 2,659 2,509 - 145 2,654
------ ------ ----- ------ ----- ----- ----- ----- --- ----- ----- ---- ---- -----
Less PV interest (666) (90) (756) (520) (630)(1,150) (14) (110)(63) (187) (1,200) (200) (693) (2,093)
------ ------ ----- ------ ------ ----- ----- ----- --- ----- ----- ---- ---- -----
Total amount recorded
on Statements of
Operations excluding
PV interest (5,529) - (5,529) 4,482 - 4,482 5,029 - 145 5,174 3,982 - 145 4,127
Less closing costs 5 - 5 - - - (1,939) -(222)(2,161) (1,934) - (222) (2,156)
Less costs
included in
discontinued
operations - - - - - - - - 77 77 - - 77 77
------ ----- ----- ----- ----- ----- ----- ----- ---- ----- ------ ------ ------ ------
Total amount recorded
in Statements of
Cash Flows $(5,524) $ - $(5,524) $ 4,482 $ - $4,482 $3,090 $ - $ - $3,090 $ 2,048 $ - $ - $2,048
======= ==== ======= ====== ===== ====== ====== ==== === ====== ======= ===== ==== ======
28
PROJECT GREAT RENEWAL
The following table summarizes the activity related to this phase of the
initiative over the last three fiscal years:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ -- $ 2,157 $ 33,629 $ 452 $ 34,081
Addition (1) 1,902 20 1,922 -- -- -- 1,902 20 1,922
Utilization (2) (5,410) (222) (5,632) (497) -- (497) (5,907) (222) (6,129)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 26, 2005 $ 27,964 $ 250 $ 28,214 $ 1,660 $ -- $ 1,660 $ 29,624 $ 250 $ 29,874
Addition (1) 1,541 7 1,548 -- -- -- 1,541 7 1,548
Utilization (2) (5,858) (167) (6,025) (223) -- (223) (6,081) (167) (6,248)
Adjustments (3) (3,648) (90) (3,738) -- -- -- (3,648) (90) (3,738)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 25, 2006 $ 19,999 $ -- $ 19,999 $ 1,437 $ -- $ 1,437 $ 21,436 $ -- $ 21,436
Addition (1) 894 -- 894 -- -- -- 894 -- 894
Utilization (2) (4,428) -- (4,428) (132) -- (132) (4,560) -- (4,560)
Adjustments (3) (5,429) -- (5,429) (95) -- (95) (5,524) -- (5,524)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 24, 2007 $ 11,036 $ -- $ 11,036 $ 1,210 $ -- $ 1,210 $ 12,246 $ -- $ 12,246
Addition (1) 405 -- 405 -- -- -- 405 -- 405
Utilization (2) (2,476) -- (2,476) (163) -- (163) (2,639) -- (2,639)
Adjustments (3) (351) -- (351) -- -- -- (351) -- (351)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
December 1, 2007 $ 8,614 $ -- $ 8,614 $ 1,047 $ -- $ 1,047 $ 9,661 $ -- $ 9,661
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy represent the interest accretion on
future occupancy costs which were recorded at present value at the time of
the original charge. During the 40 weeks ended December 1, 2007, $0.06
million was recorded to Midwest 2007 in discontinued operations.
(2) Occupancy utilization represents payments made during those periods for
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance utilization represents payments to
individuals for severance and benefits, as well as payments to pension
funds for early withdrawal from multi-employer union pension plans.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. We have continued to make favorable
progress in marketing and subleasing the closed stores. As a result,
during fiscal 2005, we recorded an additional reduction of $3.6 million in
occupancy accruals due to subleasing additional closed stores and
converting a previously closed store to a store that was opened in fiscal
2006. In addition, we sold our Canadian business and as a result, the
Canadian occupancy accruals of $0.1 million are no longer consolidated in
our Consolidated Balance Sheet at February 25, 2006. During fiscal 2006,
we recorded adjustments for a reduction in vacancy related costs for our
properties of $5.4 million due to lease terminations for two properties,
assignment of one property and changes in our estimation of such future
costs. We also recorded a decrease of $0.1 million for the reversal of
previously accrued severance and benefits due to changes in individual
severings and associated benefit costs. During the 40 weeks ended December
1, 2007, we recorded adjustments for a reduction in vacancy related costs
for our properties of $0.4 million due to changes in our estimation of
such future costs.
We paid $111.3 million of the total occupancy charges from the time of the
original charges through December 1, 2007 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $30.4 million of the total net severance charges from
the time of the original charges through December 1, 2007, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $8.6 million relates to expected future payments under long term
leases and is expected to be paid in full by 2013. The remaining
29
severance liability of $1.0 million primarily relates to expected future
payments for early withdrawals from multi-employer union pension plans and will
be fully paid out in 2020. None of these stores were open during either of the
12 and 40 weeks ended December 1, 2007 or December 2, 2006.
At December 1, 2007 and February 24, 2007, approximately $2.8 million and $3.0
million, respectively, of the reserve was included in "Other accruals" and $6.9
million and $9.2 million, respectively, was included in "Other non-current
liabilities" on the Company's Consolidated Balance Sheets.
We have evaluated the reserve balances as of December 1, 2007 of $9.7 million
based on current information and have concluded that it is adequate to cover
expected future costs. We will continue to monitor the status of the vacant
properties and adjustments to the reserve balances may be recorded in the
future, if necessary.
2001 ASSET DISPOSITION
The following table summarizes the activity related to this phase of the
initiative recorded on the Consolidated Balance Sheets over the last three
fiscal years:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328
Addition (1) 2,449 -- 2,449 -- -- -- 2,449 -- 2,449
Utilization (2) (5,646) (375) (6,021) (2,197) (58) (2,255) (7,843) (433) (8,276)
Adjustments (3) (4,488) -- (4,488) -- -- -- (4,488) -- (4,488)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 26, 2005 $ 31,899 $ -- $ 31,899 $ 114 $ -- $ 114 $ 32,013 $ -- $ 32,013
Addition (1) 2,170 -- 2,170 -- -- -- 2,170 -- 2,170
Utilization (2) (5,262) -- (5,262) (97) -- (97) (5,359) -- (5,359)
Adjustments (3) (2,089) -- (2,089) -- -- -- (2,089) -- (2,089)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 25, 2006 $ 26,718 $ -- $ 26,718 $ 17 $ -- $ 17 $ 26,735 $ -- $ 26,735
Addition (1) 1,444 -- 1,444 -- -- -- 1,444 -- 1,444
Utilization (2) (11,875) -- (11,875) (17) -- (17) (11,892) -- (11,892)
Adjustments (3) 4,299 -- 4,299 -- -- -- 4,299 -- 4,299
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 24, 2007 $ 20,586 $ -- $ 20,586 $ -- $ -- $ -- $ 20,586 $ -- $ 20,586
Addition (1) 892 -- 892 -- -- -- 892 -- 892
Utilization (2) (1,740) -- (1,740) -- -- -- (1,740) -- (1,740)
Adjustments (3) 10 -- 10 -- -- -- 10 -- 10
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
December 1, 2007 $ 19,748 $ -- $ 19,748 $ -- $ -- $ -- $ 19,748 $ -- $ 19,748
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy represent the interest accretion on
future occupancy costs which were recorded at present value at the time of
the original charge. During the 40 weeks ended December 1, 2007, $0.6
million was recorded to Greater New Orleans in discontinued operations.
(2) Occupancy utilization represents payments made during those periods for
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance utilization represents payments made to
terminated employees during the period.
(3) At each balance sheet date, we assess the adequacy of the reserve balance
to determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2004, we recorded
adjustments of $4.5 million related to the reversals of previously accrued
occupancy costs due to the disposals and subleases of locations at more
30
favorable terms than originally anticipated at the time of the original
charge. During fiscal 2005, we recorded adjustments of $2.1 million
related to the reversals of previously accrued occupancy costs due to the
favorable result of subleasing one of the closed properties and changes in
our original estimate of our future vacancy obligations for closed stores.
During fiscal 2006, we recorded adjustments for additional vacancy related
costs of $4.3 million due to changes in our estimate to terminate certain
leases and changes in our estimation of future costs. During the 40 weeks
ended December 1, 2007, we recorded adjustments for additional vacancy
related costs of $0.01 million due to changes in our estimation of such
future costs.
We paid $58.1 million ($55.1 million in the U.S. and $3.0 million in Canada) of
the total occupancy charges from the time of the original charges through
December 1, 2007 which was primarily for occupancy related costs such as rent,
common area maintenance, real estate taxes and lease termination costs. We paid
$28.2 million ($19.2 million in the U.S. and $9.0 million in Canada) of the
total net severance charges from the time of the original charges through
December 1, 2007, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $19.7 million primarily relates
to expected future payments under long term leases through 2022. The severance
liability has been fully utilized as of December 1, 2007 and no additional
future payments for severance and benefits to individual employees will be paid
out. None of these stores were open during either of the 12 and 40 weeks ended
December 1, 2007 or December 2, 2006.
At December 1, 2007 and February 24, 2007, approximately $2.9 million and $3.0
million of the reserve, respectively, was included in "Other accruals" and $16.8
million and $17.6 million, respectively, was included in "Other non-current
liabilities" on the Company's Consolidated Balance Sheets.
We have evaluated the reserve balances as of December 1, 2007 of $19.7 million
based on current information and have concluded that it is adequate to cover
expected future costs. We will continue to monitor the status of the vacant
properties and adjustments to the reserve balances may be recorded in the
future, if necessary.
DISTRIBUTION 2005
During fiscal 2005, our Company sold our U.S. distribution operations and some
warehouse facilities and related assets to C&S Wholesale Grocers, Inc. On June
27, 2005, the definitive agreements, including an Asset Purchase Agreement and a
15 year Supply Agreement, were finalized and signed. The Asset Purchase
Agreement included the assignment of our leases in Central Islip, New York and
Baltimore, Maryland, and a warranty deed for our owned facilities in Dunmore,
Pennsylvania. In the Supply Agreement, C&S Wholesale Grocers, Inc. will supply
our Company with all of our requirements for groceries, perishables, frozen food
and other merchandise in the product categories carried by C&S Wholesale
Grocers, Inc. The transition of our owned warehouses and operations began in the
third quarter of fiscal 2005 and was completed during the fourth quarter of
fiscal 2005.
31
The following table summarizes the activity to date related to the charges
recorded for the closing of these facilities.
Severance and
Occupancy Benefits Total
----------- ------------- ---------
Original charge (1) $ -- $ 40,417 $ 40,417
Additions (2) 15,420 7,296 22,716
Utilization (3) (337) (43,597) (43,934)
Adjustments (4) -- (493) (493)
----------- ------------- ---------
Balance at
February 25, 2006 $ 15,083 $ 3,623 $ 18,706
Additions (2) 244 32 276
Utilization (3) (12,075) (2,780) (14,855)
Adjustment (4) 2,198 1 2,199
----------- ------------- ---------
Balance at
February 24, 2007 $ 5,450 $ 876 $ 6,326
Additions (2) 131 2,318 2,449
Utilization (3) (771) (1,440) (2,211)
Adjustment (4) (3,469) -- (3,469)
----------- ------------- ---------
Balance at
December 1, 2007 $ 1,341 $ 1,754 $ 3,095
=========== ============= =========
(1) The original charge to severance and benefits during the first quarter of
fiscal 2005 of $40.4 million related to (i.) individual severings as well
as retention and productivity incentives that were accrued as earned of
$7.6 million and (ii.) costs for future obligations for early withdrawal
from multi-employer union pension plans of $32.8 million.
(2) The additions to occupancy during fiscal 2005 related to future occupancy
costs such as rent, common area maintenance and real estate taxes, and
future obligations for the warehouses sold to C&S Wholesale Grocers, Inc.
The additions to occupancy during fiscal 2006 and the 40 weeks ended
December 1, 2007 represent interest accretion on future occupancy costs
which were recorded at present value at the time of the original charge.
During the 40 weeks ended December 1, 2007, $0.02 million was recorded to
Greater New Orleans and $0.07 million was recorded to Midwest 2007 in
discontinued operations. The additions to severance and benefits
represented charges related to additional individual severings as well as
retention and productivity incentives that were accrued as earned. During
the 40 weeks ended December 1, 2007, we recorded additions to severance
and benefits of $2.3 million for health and welfare benefits for warehouse
retirees of $1.6 million and pension withdrawal costs of $0.7 million.
(3) Occupancy utilization represents payments made during those periods for
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance and benefits utilization represents payments
made to terminated employees during the period as well as payments made to
pension funds for early withdrawal from multi-employer union pension
plans.
(4) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During the fiscal 2005, we recorded
adjustments of $0.5 million primarily related to reversals of previously
accrued severance and benefits due to changes in individual severings and
associated benefit costs. During fiscal 2006, we recorded adjustments for
additional vacancy related costs for our properties of $2.2 million due to
changes in our estimation of such future costs. During the 40 weeks ended
December 1, 2007, we recorded adjustments for a reduction in vacancy
related costs for our properties of $3.5 million due to (i.) changes in
our estimation of such future costs of $0.9 million and (ii.) $2.6 million
for one property that was reclassified to Midwest 2007 in discontinued
operations.
We paid $13.2 million of the total occupancy charges from the time of the
original charge through December 1, 2007 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. The remaining occupancy liability of $1.3 million relates to
expected future payments under long term leases and is expected to be paid out
in full by 2021. We paid $47.8 million of the total net severance and benefits
charges from the time of the original charges through December 1, 2007. The
remaining severance liability of $1.8 million relates to expected
32
future payments for early withdrawals from multi-employer union pension plans
and expected future payments for severance and benefits payments to individual
employees which will be fully paid out by 2015.
As of December 1, 2007 and February 24, 2007, approximately $0.5 million and
$1.7 million, respectively, was included in "Other Accruals" and $2.6 million
and $4.6 million, respectively, was included in "Other non-current liabilities"
on our Consolidated Balance Sheets.
We have evaluated the reserve balances as of December 1, 2007 of $3.1 million
based on current information and have concluded that it is adequate to cover
expected future costs. We will continue to monitor the status of the vacant
properties and adjustments to the reserve balances may be recorded in the
future, if necessary.
Our Company currently acquires a significant amount of our saleable inventory
from one supplier, C&S Wholesale Grocers, Inc. Although there are a limited
number of distributors that can supply our stores, we believe that other
suppliers could provide similar product on comparable terms. However, a change
in suppliers could cause a delay in distribution and a possible loss of sales,
which would affect operating results adversely.
9. RETIREMENT PLANS AND BENEFITS
On February 24, 2007, we adopted SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132 (R)" ("SFAS 158") which required that we
recognize the funded status of our defined benefit pension and other
postretirement benefit plans as a net liability or asset on our balance sheets
and requires any unrecognized prior service costs and actuarial gains or losses
to be recognized as a component of accumulated other comprehensive income or
loss. Minimum pension liabilities and related intangible assets were
derecognized upon adoption. Beginning in our fiscal 2008, SFAS 158 requires that
our assumptions used to measure our annual expenses be determined as of the
balance sheet date (February 28, 2009), and all plan assets and liabilities to
be reported as of that date. We have chosen to early adopt this requirement in
fiscal 2007. We used the second approach as described in paragraph 19 of SFAS
158 to transition our measurement date from December 31, 2006 to February 24,
2007. Under this approach, we have recorded an adjustment to opening retained
earnings in the amount of $0.6 million to decrease the February 25, 2007 balance
of retained earnings.
DEFINED BENEFIT PLANS
We provide retirement benefits to certain non-union and union employees under
various defined benefit plans. Our defined benefit pension plans are
non-contributory and benefits under these plans are generally determined based
upon years of service and, for salaried employees, compensation. We fund these
plans in amounts consistent with the statutory funding requirements.
In the third quarter of fiscal 2007, we recorded a curtailment gain of $0.2
million reflecting a reduction in the estimated future costs of previously
recorded pension benefits as a result of the closure of stores in the Midwest.
This amount was included in "(Loss) income from operations of discontinued
businesses, net of tax" on our Consolidated Statements of Operations. In
addition, we recorded a settlement gain of $1.0 million resulting from lump sum
payments of benefits in excess of our recorded liabilities for both former
employees in the Midwest and the Northeast. Of this amount $0.9 million was
included in "(Loss) income
33
from operations of discontinued businesses, net of tax" and $0.1 million was
included in "Store operating, general and administrative expense" on our
Consolidated Statements of Operations for the 12 and 40 weeks ended December 1,
2007.
The components of net pension cost were as follows:
For the 12 Weeks Ended
---------------------------
December 1, December 2,
2007 2006
---------- -----------
Service cost $ 1,137 $ 1,219
Interest cost 2,800 2,612
Expected return on plan assets (3,031) (2,850)
Amortization of unrecognized net prior service cost (gain) 58 (41)
Amortization of unrecognized net loss 23 38
Curtailment gain (167) --
Settlement gain (1,047) --
Administrative expenses and other -- 116
---------- -----------
Net pension (income) cost $ (227) $ 1,094
========== ===========
For the 40 Weeks Ended
---------------------------
December 1, December 2,
2007 2006
---------- -----------
Service cost $ 3,789 $ 4,064
Interest cost 9,334 8,705
Expected return on plan assets (10,103) (9,500)
Amortization of unrecognized net prior service cost (gain) 196 (137)
Amortization of unrecognized net loss 76 125
Curtailment gain (167) --
Settlement gain (1,047) --
Administrative expenses and other -- 311
----------- ----------
Net pension cost $ 2,078 $ 3,568
=========== ==========
CONTRIBUTIONS
We previously disclosed in our consolidated financial statements for the year
ended February 24, 2007, that we expected to contribute $5.6 million in cash to
our defined benefit plans in fiscal 2007. As of December 1, 2007, we contributed
approximately $3.5 million to our defined benefit plans. We plan to contribute
approximately $2.1 million to our plans during the remainder of fiscal 2007.
POSTRETIREMENT BENEFITS
We provide postretirement health care and life benefits to certain union and
non-union employees. We recognize the cost of providing postretirement benefits
during employees' active service periods. We use a February 24 measurement date
for our postretirement benefits. The components of net postretirement benefits
income were as follows:
For the 12 Weeks Ended
---------------------------
December 1, December 2,
2007 2006
---------- -----------
Service cost $ 75 $ 87
Interest cost 243 270
Amortization of gain (105) (51)
Prior service gain (311) (311)
Curtailment change in estimate 3,000 --
---------- -----------
Net postretirement benefits cost (income) $ 2,902 $ (5)
========== ===========
34
For the 40 Weeks Ended
---------------------------
December 1, December 2,
2007 2006
---------- -----------
Service cost $ 251 $ 288
Interest cost 809 902
Amortization of gain (350) (171)
Prior service gain (1,036) (1,036)
---------- -----------
Net postretirement benefits income $ (326) $ (17)
========== ===========
During the third quarter of fiscal 2007, we recorded a change in estimate of
$3.0 million based on our revised actuarial estimate that originally reflected a
reduction in the estimated future costs of previously recorded postretirement
benefits.
10. STOCK BASED COMPENSATION
During the 12 and 40 weeks ended December 1, 2007, compensation expense related
to share-based incentive plans was $2.0 million and $7.3 million, after tax,
respectively, compared to $0.8 million and $6.6 million, after tax, during the
12 and 40 weeks ended December 2, 2006, respectively. Included in share-based
compensation expense recorded during the 12 and 40 weeks ended December 1, 2007
was $0.1 million and $0.4 million, respectively, related to expensing of stock
options, $1.8 million and $6.5 million, respectively, relating to expensing of
restricted stock, and $0.1 million and $0.4 million, respectively, relating to
expensing of common stock to be granted to our Board of Directors at the Annual
Meeting of Stockholders. Included in share-based compensation expense recorded
during the 12 and 40 weeks ended December 2, 2006 was $0.2 million and $0.9
million, respectively, related to expensing of stock options, $0.5 million and
$4.8 million, respectively, relating to expensing of restricted stock, and $0.1
million and $0.9 million, respectively, relating to expensing of common stock to
be granted to our Board of Directors at the Annual Meeting of Stockholders.
At December 1, 2007, we had two stock-based compensation plans. The general
terms of each plan, the method of estimating fair value for each plan and fiscal
2007 and 2006 activity is reported below.
I. The 1998 Long Term Incentive and Share Award Plan: This plan provides for
the grant of awards in the form of options, SAR's, restricted shares,
restricted share units, performance shares, performance units, dividend
equivalent, or other share based awards to our Company's officers and key
employees. The total number of shares available for issuance under this
plan is 6,000,000 subject to anti-dilution provisions. Options and SAR's
issued under this plan vest 25% on each anniversary date of issuance over
a four year period.
Performance restricted stock units issued under this plan during fiscal
2005 are earned based on our Company achieving in fiscal 2007 a profit
after taxes, after adjusting for specific matters which our Company
considers to be of a non-operating nature, with an outlook for continued,
sustainable profitability on the same basis. On June 15, 2007, the Human
Resources & Compensation Committee and the Governance Committee (together,
the "Committees") decided to recognize our Company's performance to date
for these units subject to the closing of the Pathmark transaction. Upon
the closing of the Pathmark transaction, which occurred subsequent to our
quarter end, the applicable performance criteria was deemed to have been
met with respect to two-thirds of the units granted in fiscal 2005. These
units will vest 50% on the first day of fiscal 2008 and the remaining 50%
will vest on the first day of fiscal 2009, in accordance with and subject
to all other terms, conditions, limitations, restrictions and eligibility
requirements. As two-thirds of the units will only be considered earned
upon the closing of the Pathmark transaction on December 3,
35
2007, this modification of terms did not result in the recording of any
additional compensation expense during the 12 and 40 weeks ended December
1, 2007. Refer to Note 15 - Subsequent Events for further discussion.
Performance restricted stock units issued under this plan during fiscal
2006 are earned based on our Company achieving certain operating targets
in fiscal 2008 and are 100% vested in fiscal 2008 upon achievement of
those targets. On June 15, 2007, the Committees decided to recognize our
Company's performance to date for these units subject to the closing of
the Pathmark transaction. Upon the closing of the Pathmark transaction,
which occurred subsequent to our quarter end, the applicable performance
criteria was deemed to have been met with respect to 125% of one-third of
the units granted in fiscal 2006. These units will vest on or around May
of 2009, in accordance with and subject to all other terms, conditions,
limitations, restrictions and eligibility requirements. As one-third of
the units will only be considered earned upon the closing of the Pathmark
transaction on December 3, 2007, this modification of terms did not result
in the recording of any additional compensation expense during the 12 or
40 weeks ended December 1, 2007. Refer to Note 15 - Subsequent Events for
further discussion.
Performance restricted stock units issued under this plan during fiscal
2007, are earned based on our Company achieving certain operating targets
in fiscal 2009 and are 100% vested in fiscal 2009 upon achievement of
those targets.
On June 15, 2007, the Committees approved an executive Acquisition Closing
and Integration Incentive Compensation Program (the "Integration
Program"). The executive Integration Program is subject to: a) the closing
of the Pathmark transaction; b) the achievement of certain Pathmark
transaction closing performance criteria or certain Pathmark transaction
synergy targets; c) the achievement of certain Company stock price targets
over a performance period comprised of the three calendar years following
the closing of the Pathmark transaction; and d) other terms, conditions,
limitations, restrictions and eligibility requirements. Depending on
actual performance as compared with the foregoing targets, each executive
officer can earn up to a maximum of 200% of the performance restricted
share units awarded them under the Integration Plan.
Also on June 15, 2007, the Committees approved a non-executive Integration
Program. The non-executive Integration Program is subject to: a) the
closing of the Pathmark transaction; b) the achievement of certain
Pathmark transaction closing performance criteria or certain Pathmark
transaction synergy targets; c) the achievement of certain Company stock
price targets over a performance period comprised of the 24 month period
following the closing of the Pathmark transaction; and d) other terms,
conditions, limitations, restrictions and eligibility requirements.
Depending on actual performance as compared with the foregoing targets,
each non-executive officer can earn up to a maximum of 125% of the
performance restricted share units awarded them under the Integration
Plan.
In accordance with SFAS 123R (revised 2004), "Share-Based Payment" ("SFAS
123R"), although the executive and non-executive Integration Programs were
contingent upon the closing of the Pathmark transaction, the restricted
share units awarded to each executive officer were considered granted on
June 15, 2007 and each non-executive officer were considered granted on
August 7, 2007. Upon the closing of the Pathmark transaction on December
3, 2007, compensation expense will be recorded over the vesting period as
these units are earned upon achievement of the other terms as described
above. Refer to Note 15 - Subsequent Events for further discussion.
36
The stock option awards under The 1998 Long Term Incentive and Share Award
Plan are granted at the fair market value of the Company's common stock at
the date of grant. Fair value calculated under SFAS 123, as amended,
"Accounting for Stock-Based Compensation" is used to recognize expense
upon adoption of SFAS 123R. Fair values for each grant were estimated
using a Black-Scholes valuation model which utilized assumptions as
detailed in the following table for expected life based upon historical
option exercise patterns, historical volatility for a period equal to the
stock option's expected life, and risk-free rate based on the U.S.
Treasury constant maturities in effect at the time of grant. Our stock
options have a contractual term of 10 years. During the 12 weeks ended
December 1, 2007 and December 2, 2006, our Company did not grant any stock
options under this plan. The following assumptions were in place during
the 40 weeks ended December 1, 2007 and December 2, 2006:
40 weeks ended 40 weeks ended
Dec. 1, 2007 Dec. 2, 2006
-------------- --------------
Expected life 7 years 7 years
Volatility 54% - 55% 56%
Risk-free interest rate 4.46% - 4.57% 4.96%
Performance restricted stock units issued under The 1998 Long Term
Incentive and Share Award Plan are granted at the fair market value of the
Company's common stock at the date of grant, adjusted by an estimated
forfeiture rate.
Stock options
The following is a summary of the stock option activity during the 40
weeks ended December 1, 2007:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term (years) Value
------------- ------------- ------------ -------------
Outstanding at February 24, 2007 1,324,980 $ 15.50
Granted 84,961 32.28
Canceled or expired (23,161) 16.40
Exercised (368,974) 16.85
------------- ----------
Outstanding at December 1, 2007 1,017,806 $ 16.39 3.9 $ 13,905
============= ========== ============= ===========
Exercisable at:
December 1, 2007 869,637 $ 14.29 3.1 $ 13,704
============= ===========
Nonvested at:
December 1, 2007 148,169 $ 28.70 8.7 $ 201
============= ===========
The total intrinsic value of options exercised during the 40 weeks ended
December 1, 2007 was $5.7 million.
The weighted average grant date fair value of stock options granted during
the 40 weeks ended December 1, 2007 was $19.47.
As of December 1, 2007, approximately $1.3 million, after tax, of total
unrecognized compensation expense related to unvested stock option awards
will be recognized over a weighted average period of 2.8 years.
The amount of cash received from the exercise of stock options was
approximately $6.2 million.
37
Performance Restricted Stock Units
During the 12 and 40 weeks ended December 1, 2007, our Company granted nil
and 708,696 shares of performance restricted stock units to selected
employees, respectively, for a total grant date fair value of $23.2
million. Approximately $12.3 million of unrecognized fair value
compensation expense relating to all of our performance restricted stock
units, with the exception of those granted under the Integration Program,
is expected to be recognized through fiscal 2009 based on estimates of
attaining vesting criteria. Upon closing of the Pathmark transaction,
which occurred subsequent to our quarter end, and achievement of other
terms as described under the Integration Program above, approximately
$10.1 million of additional unrecognized fair value compensation expense
relating to the performance restricted stock units granted on June 15,
2007 and August 7, 2007 is expected to be recognized through 2010.
The following is a summary of the performance restricted stock units
activity during the 40 weeks ended December 1, 2007:
Weighted
Average
Exercise
Shares Price
------------- -------------
Nonvested at February 24, 2007 1,767,451 $ 14.73
Granted 708,696 32.77
Canceled or expired (207,494) 13.59
Exercised -- --
------------- -------------
Nonvested at December 1, 2007 2,268,653 $ 20.47
============= =============
II. 2004 Non-Employee Director Compensation Plan: This plan provides for the
annual grant of Company common stock equivalent of $90 to members of our
Board of Directors. The $90 grant of common stock shall be made on the
first business day following the Annual Meeting of Stockholders. The
number of shares of our Company's $1.00 common stock granted annually to
each non-employee Director will be based on the closing price of the
common stock on the New York Stock Exchange, as reported in the Wall
Street Journal on the date of grant. Only whole shares will be granted;
any remaining amounts will be paid in cash as promptly as practicable
following the date of grant.
11. INCOME TAXES
The income tax provision recorded for the 40 weeks ended December 1, 2007 and
December 2, 2006 reflects our estimated expected annual tax rates applied to our
respective domestic and foreign financial results.
SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109") provides that a deferred
tax asset is recognized for temporary differences that will result in deductible
amounts in future years and for carryforwards. In addition, SFAS 109 requires
that a valuation allowance be recognized if, based on existing facts and
circumstances, it is more likely than not that some portion or all of the
deferred tax asset will not be realized. Based upon our continued assessment of
the realization of our net deferred tax asset, we recorded a valuation allowance
in an amount that would appropriately reduce our net deferred tax asset to
reflect our assessment of its realizability. For the 12 and 40 weeks ended
December 1, 2007, the valuation allowance was decreased by $4.4 million and
increased by $36.7 million, respectively, as compared to decreased by $11.9
million and $19.0 million during the 12 and 40 weeks ended December 2, 2006. To
the extent that our operations generate sufficient taxable income in future
periods, we will reverse the income tax valuation allowance. In future periods,
we will continue to record a valuation allowance
38
against net deferred tax assets that are created by losses until such time as
the certainty of future tax benefits can be reasonably assured.
Effective February 25, 2007, we adopted FIN 48. Refer to Note 2 - Impact of New
Accounting Pronouncements for further discussion. As a result of our adoption of
FIN 48, we recorded the following transition adjustments:
- a decrease in our tax liabilities for uncertain tax positions of $24.4
million;
- a $165.0 million increase in our tax liabilities for uncertain tax
positions and deferred tax assets to gross-up our balance sheet for the
tax benefits of net operating losses ("NOLs") that had previously been
netted in our uncertain tax position liability; and
- an increase in deferred tax assets of $38.5 million related to foreign tax
credit carryforwards offset by an increase in deferred tax liabilities of
$25.1 million as a result of the book versus tax basis of our foreign
subsidiary and a corresponding increase in the valuation allowance of
$13.4 million upon initial adoption of the standard.
For the 12 and 40 weeks ended December 1, 2007 and December 2, 2006, no amounts
were recorded for interest and penalties within "(Provision for) benefit from
income taxes" in our Consolidated Statements of Operations.
Our Company is subject to U.S. federal income tax, as well as income tax in
multiple state and foreign jurisdictions. As of December 1, 2007, we were
subject to examination in the U.S. federal tax jurisdiction for the 1997 to 2006
tax years and we were also subject to examination in most state jurisdictions
for the 1997 to 2006 tax years as well.
The effective tax rate on continuing operations of 2.3% for the 12 weeks ended
December 1, 2007 varied from the statutory rate of 35% primarily due to state
and local income taxes and a decrease to our valuation allowance as a result of
the utilization of loss carryforwards that were not previously tax benefited.
The effective tax rate on continuing operations of 461.6% for the 12 weeks ended
December 2, 2006 varied from the statutory rate of 35% primarily due to a
reduction in our valuation allowance and taxes not being provided on
undistributed earnings of Metro, Inc.
The effective tax rate on continuing operations of 3.2% for the 40 weeks ended
December 1, 2007 varied from the statutory rate of 35% primarily due to state
and local income taxes and a decrease to our valuation allowance as a result of
the utilization of loss carryforwards that were not previously tax benefited.
The effective tax rate on continuing operations of 174.4% for the 40 weeks ended
December 2, 2006 varied from the statutory rate of 35% primarily due to a
reduction in our valuation allowance and taxes not being provided on
undistributed earnings of Metro, Inc.
At December 1, 2007, we had NOL carryfowards for federal income tax purposes of
$245.8 million that expire beginning in 2033.
At December 1, 2007 and February 24, 2007, we had a net current deferred tax
asset which is included in "Prepaid expenses and other current assets" on our
Consolidated Balance Sheets of $43.4 million and $40.2 million, respectively, a
net non-current deferred tax asset which is included in "Other Assets" on our
Consolidated Balance Sheets of $121.5 million and nil, respectively, a net
non-current deferred tax liability
39
which is included in "Other non-current liabilities" on our Consolidated Balance
Sheets of nil and $40.2 million, respectively, and a non-current tax liability
for uncertain tax positions which is included in "Other non-current liabilities"
on our Consolidated Balance Sheets of $165.0 million and $24.4 million,
respectively.
12. 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. Our chief operating decision maker is our President and
Chief Executive Officer.
During fiscal 2006, our retail supermarkets were reported in one segment;
however, during the first quarter of fiscal 2007, we announced our intentions to
sell our operations in the Greater New Orleans area and in the Midwest,
resulting in a change in management's review of these operations. The criteria
necessary to classify the Midwest and Greater New Orleans area as discontinued
have been satisfied and these operations have been reclassified as such in our
Consolidated Statements of Operations for the 12 and 40 weeks ended December 1,
2007 and December 2, 2006. Refer to Note 7 - Discontinued Operations for further
discussion. Prior year information has been restated to conform to current year
presentation.
During the 12 and 40 weeks ended December 1, 2007, we operated in two reportable
segments: Northeast and our investment in Metro, Inc. Our Northeast segment is
comprised of retail supermarkets and all corporate related charges. Our
investment in Metro, Inc. represents our economic interest in Metro, Inc. and is
required to be reported as an operating segment in accordance with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" as our
investment was greater than 10% of our Company's combined assets of all
operating segments and the investment generated operating income during the 40
weeks ended December 1, 2007.
The accounting policies for these segments are the same as those described in
the summary of significant accounting policies included in our revised Fiscal
2006 Annual Report on Form 8-K dated October 24, 2007. We measure segment
performance based upon segment (loss) income.
Interim information on segments is as follows:
For the 12 weeks ended December 1, 2007
-----------------------------------------------------------------------------------
Grocery (1) Meat (2) Produce (3) Other (4) Total
--------------- --------------- --------------- --------------- -------------
Sales by Category $ 851,860 $ 241,636 $ 157,611 $ 16 $ 1,251,123
=============== ============== =============== =============== =============
(1) The grocery category includes grocery, frozen foods, dairy, general
merchandise/health and beauty aids, liquor and pharmacy.
(2) The meat category includes meat, deli, bakery and seafood.
(3) The produce category includes produce and floral.
(4) Other includes sales from an information technology services agreement
with Metro, Inc.
40
For the 12 weeks ended December 1, 2007
--------------------------------------------------
Northeast Metro, Inc. Total
--------------- -------------- ---------------
Sales $ 1,251,123 $ -- $ 1,251,123
=============== ============== ===============
Segment loss $ (12,140) $ -- $ (12,140)
Reconciliation:
Net restructuring (168) -- (168)
Pathmark acquisition (4,392) -- (4,392)
Real estate related activity (4,449) -- (4,449)
Income from an information technology services
agreement with Metro, Inc. 16 -- 16
--------------- -------------- ---------------
Loss from operations $ (21,133) $ -- $ (21,133)
=============== ============== ===============
Gain on sale of Canadian operations $ 495 $ -- $ 495
Gain on disposition of Metro, Inc. -- 106,063 106,063
Interest expense (14,499) -- (14,499)
Interest and dividend income 2,535 1,375 3,910
--------------- -------------- ---------------
(Loss) income from continuing
operations before income taxes $ (32,602) $ 107,438 $ 74,836
=============== ============== ===============
Depreciation and amortization by segment $ 32,654 $ -- $ 32,654
=============== ============== ---------------
Depreciation and amortization for
discontinued operations --
---------------
Total Company $ 32,654
===============
Capital expenditures by segment $ 18,687 $ -- $ 18,687
=============== ============== ---------------
Capital expenditures for discontinued operations --
---------------
Total Company $ 18,687
===============
For the 12 weeks ended December 2, 2006
-----------------------------------------------------------------------------------
Grocery (1) Meat (2) Produce (3) Other (4) Total
--------------- --------------- --------------- --------------- -------------
Sales by Category $ 828,629 $ 232,270 $ 148,449 $ 4,128 $ 1,213,476
=============== =============== =============== ============== =============
For the 12 weeks ended December 2, 2006
--------------------------------------------------
Northeast Metro, Inc. Total
--------------- -------------- ---------------
Sales $ 1,213,476 $ -- $ 1,213,476
=============== ============== ===============
Segment loss $ (17,653) $ -- $ (17,653)
Reconciliation:
Net restructuring (402) -- (402)
Real estate related activity 8,228 -- 8,228
Income from an information technology services
agreement with Metro, Inc. 4,128 -- 4,128
--------------- -------------- ---------------
Loss from operations $ (5,699) $ -- $ (5,699)
=============== ============== ===============
Loss on sale of Canadian operations $ (599) $ -- $ (599)
Interest expense (15,342) -- (15,342)
Interest and dividend income 1,697 -- 1,697
Equity in earnings of Metro, Inc. -- 11,023 11,023
--------------- -------------- ---------------
(Loss) income from continuing
operations before income taxes $ (19,943) $ 11,023 $ (8,920)
=============== ============== ===============
41
For the 12 weeks ended December 2, 2006
--------------------------------------------------
Northeast Metro, Inc. Total
--------------- -------------- ---------------
Depreciation and amortization by segment $ 33,930 $ -- $ 33,930
=============== ============== ---------------
Depreciation and amortization for
discontinued operations 6,626
---------------
Total Company $ 40,556
===============
Capital expenditures by segment $ 60,730 $ -- $ 60,730
=============== ============== ---------------
Capital expenditures for discontinued operations 2,941
---------------
Total Company $ 63,671
===============
For the 40 weeks ended December 1, 2007
-----------------------------------------------------------------------------------
Grocery (1) Meat (2) Produce (3) Other (4) Total
--------------- -------------- --------------- -------------- -------------
Sales by Category $ 2,811,474 $ 826,217 $ 561,147 $ 5,792 $ 4,204,630
=============== ============== =============== ============== =============
For the 40 weeks ended December 1, 2007
-------------------------------------------------
Northeast Metro, Inc. Total
-------------- -------------- ---------------
Sales $ 4,204,630 $ -- $ 4,204,603
============== ============== ===============
Segment loss $ (26,765) $ -- $ (26,765)
Reconciliation:
Net restructuring (4,420) -- (4,420)
Pathmark acquisition (6,761) -- (6,761)
Real estate related activity 12,037 -- 12,037
Income from an information technology services
agreement with Metro, Inc. 5,792 -- 5,792
-------------- -------------- ---------------
Loss from operations $ (20,117) $ -- $ (20,117)
============== ============== ===============
Gain on sale of Canadian operations $ 209 $ -- $ 209
Gain on disposition of Metro, Inc. -- 184,451 184,451
Interest expense (48,806) -- (48,806)
Interest and dividend income 8,323 3,908 12,231
Equity in earnings of Metro, Inc. -- 7,869 7,869
-------------- -------------- ---------------
(Loss) income from continuing
operations before income taxes $ (60,391) $ 196,228 $ 135,837
============== ============== ===============
Depreciation and amortization by segment $ 113,977 $ -- $ 113,977
============== ============== ---------------
Depreciation and amortization for
discontinued operations 8,637
---------------
Total Company $ 122,614
===============
Capital expenditures by segment $ 96,878 $ -- $ 96,878
============== ============== ---------------
Capital expenditures for discontinued operations 1,569
---------------
Total Company $ 98,447
===============
At December 1, 2007
--------------------------------------------------
Northeast Metro, Inc. Total
--------------- -------------- ---------------
Total assets by segment $ 2,057,394 $ -- $ 2,057,394
=============== ============== ---------------
Total assets for discontinued operations 5,621
---------------
Total Company $ 2,063,015
===============
For the 40 weeks ended December 2, 2006
-----------------------------------------------------------------------------------
Grocery (1) Meat (2) Produce (3) Other (4) Total
--------------- -------------- --------------- -------------- -------------
Sales by Category $ 2,762,474 $ 792,082 $ 535,202 $ 13,672 $ 4,103,430
=============== ============== =============== ============== =============
42
For the 40 weeks ended December 2, 2006
-------------------------------------------------
Northeast Metro, Inc. Total
-------------- ------------- ---------------
Sales $ 4,103,430 $ -- $ 4,103,430
============== ============= ===============
Segment loss $ (34,582) $ -- $ (34,582)
Reconciliation:
Net restructuring (7,562) -- (7,562)
Real estate related activity 8,819 -- 8,819
Income from an information technology services
agreement with Metro, Inc. 13,672 -- 13,672
-------------- ------------- ---------------
Loss from operations $ (19,653) $ -- $ (19,653)
============== ============= ===============
Loss on sale of Canadian operations $ (890) $ -- $ (890)
Interest expense (50,167) -- (50,167)
Interest and dividend income 7,977 -- 7,977
Equity in earnings of Metro, Inc. -- 30,840 30,840
-------------- ------------- ---------------
(Loss) income from continuing
operations before income taxes $ (62,733) $ 30,840 $ (31,893)
============== ============= ===============
Depreciation and amortization by segment $ 113,314 $ -- $ 113,314
============== ============= ---------------
Depreciation and amortization for
discontinued operations 22,461
---------------
Total Company $ 135,775
===============
Capital expenditures by segment $ 169,985 $ -- $ 169,985
============== ============= ---------------
Capital expenditures for discontinued operations 14,032
---------------
Total Company $ 184,017
===============
At February 24, 2007
--------------------------------------------------
Northeast Metro, Inc. Total
--------------- -------------- ---------------
Total assets by segment $ 1,464,989 $ 368,871 $ 1,833,860
=============== ============== ---------------
Total assets for discontinued operations 277,763
---------------
Total Company $ 2,111,623
===============
13. INDEBTEDNESS
At December 1, 2007 and February 24, 2007, there were $137.6 million and $138.3
million, respectively, in letters of credit outstanding under our Letter of
Credit Agreement.
Our Company also has a $250 million Revolving Credit Agreement ("Revolver") with
four lenders enabling us to borrow funds on a revolving basis for working
capital loans and letters of credit. At December 1, 2007 and February 24, 2007,
there were no letters of credit outstanding under this agreement; however, there
were $11.3 million and $70.0 million, respectively, in outstanding borrowings
under our Revolver.
43
In March 2007, our Letter of Credit Agreement and Revolver were amended to allow
for the sale of Metro, Inc. shares provided that the net proceeds from such
sales are deposited in a restricted cash account. Refer to Note 4 - Investment
in Metro, Inc. for further discussion regarding the sale of these Metro, Inc.
shares.
During the 12 weeks ended December 1, 2007, on October 14, 2007, our Letter of
Credit Agreement was amended to extend the expiration date of the facility from
October 14, 2007 to April 14, 2008.
During the 40 weeks ended December 1, 2007, the outstanding principal amount of
our 7.75% Notes of $31.9 million due April 15, 2007 matured and was paid in
full.
In connection with the acquisition of Pathmark Stores, Inc., on December 3,
2007, we terminated our existing Revolver and entered into a new $675 million
Credit Agreement enabling us to borrow funds on a revolving basis for working
capital loans and letters of credit and a $370 million Senior Secured Bridge
Credit Agreement. In addition, on December 18, 2007, we completed our public
offering and issued $165 million 5.125% convertible senior notes due 2011 and
$255 million 6.75% convertible senior notes due 2012. The net proceeds from
these offerings were used to repay the $370 million Senior Secured Bridge Credit
Agreement. Refer to Note 15 - Subsequent Events for further discussion.
14. COMMITMENTS AND CONTINGENCIES
LaMarca et al v. The Great Atlantic & Pacific Tea Company, Inc ("Defendants").
On June 24, 2004, a class action complaint was filed in the Supreme Court of the
State of New York against The Great Atlantic & Pacific Tea Company, Inc., d/b/a
A&P, The Food Emporium, and Waldbaum's alleging violations of the overtime
provisions of the New York Labor Law. Three named plaintiffs, Benedetto Lamarca,
Dolores Guiddy, and Stephen Tedesco, alleged on behalf of a class that our
Company failed to pay overtime wages to full-time hourly employees who were
either required or permitted to work more than 40 hours per week.
In April 2006, the plaintiffs filed a motion for class certification. In July
2007, the Court granted the plaintiffs' motion and certified the class as
follows: All full-time hourly employees of Defendants who were employed in
Defendants' supermarket stores located in the State of New York, for any of the
period from June 24, 1998 through the date of the commencement of the action,
whom Defendants required or permitted to perform work in excess of 40 hours per
week without being paid overtime wages. The Court also ruled that the issue of
whether to include an "opt-in" or "opt-out" provision is premature and can be
decided after discovery has been had.
As class certification was granted only recently, and as discovery on the
prospective plaintiffs comprising the class has yet to be conducted, neither the
number of class participants nor the sufficiency of their respective claims can
be determined at this time.
Other
We are subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. We are
also subject to certain environmental claims. While the outcome of these claims
cannot be predicted with certainty, Management does not believe that the outcome
of any of these legal matters will have a material adverse effect on our
consolidated results of operations, financial position or cash flows.
44
15. SUBSEQUENT EVENTS
On December 3, 2007, we completed our acquisition of 100% of Pathmark Stores,
Inc. for $1.4 billion in cash, stock, assumed or retired debt, warrants and
options, in a transaction accounted for under SFAS No. 141 "Business
Combinations" ("SFAS 141"). Pathmark is a regional supermarket chain with
supermarkets in the New York, New Jersey and Philadelphia metropolitan areas.
The terms of the consent agreement, as discussed in Note 3 - Definitive Merger
Agreement with Pathmark Stores, Inc., require the divestiture of six stores
located in the state of New York. We have entered into definitive agreements to
sell all six stores and have received FTC approval on these divestitures.
Included in the Consolidated Statements of Operations for the 12 and 40 weeks
ended December 1, 2007 and December 2, 2006 are the sales and operating results
of the 5 A&P stores that will be closed. The remaining store to be closed was a
Pathmark location as of December 1, 2007 and accordingly the results of
operations of that store were not included in our results of operations. The
results of these operations are as follows:
12 Weeks Ended 40 Weeks Ended
------------------------- -------------------------
December 1, December 2, December 1, December 2,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Sales $ 25,696 $ 24,916 $ 85,055 $ 83,038
=========== =========== =========== ===========
Income from operations $ 228 $ 73 $ 704 $ 33
=========== =========== =========== ===========
This acquisition creates value based on the strengths of each company and the
combined company's ability to better serve customers in the New York, New Jersey
and Philadelphia metro areas.
Under the merger agreement, each share of Pathmark common stock outstanding was
converted into 0.12963 shares of A&P common stock (together with cash in lieu of
fractional shares) and $9.00 in cash. We issued 6,781,067 shares of A&P common
stock and paid $470.8 million to Pathmark common stockholders based on the
number of shares of unrestricted Pathmark common stock outstanding, less shares
of restricted stock and shares held in treasury on November 30, 2007, of
52,310,959.
We issued 1,107,156 roll-over stock options in exchange for Pathmark options
granted prior to June 9, 2005 that have exercise prices greater than or equal to
$12.90, the quoted market price of Pathmark common stock on November 30, 2007,
the last trading day before the closing date of the merger on December 3, 2007.
The underlying stock price at the closing date of the merger was calculated
using a ratio of the quoted closing market price for the Pathmark common stock
on the merger closing date. In determining the purchase price, the options are
valued using a Black-Scholes valuation model and a market price of $12.92, the
average quoted closing market price of Pathmark common stock for the two trading
days prior to the closing date and the closing date.
We also assumed 5,294,118 of outstanding Pathmark 2000 warrants. Upon exercise
at the price of $22.31, each warrant will entitle the holder to receive 0.12963
shares of A&P common stock and $9.00 in cash. In determining the purchase price,
the 2000 warrants are valued using a Black-Scholes valuation model using the
price of A&P common stock of $32.08 per common share, the average quoted market
price of A&P common stock for two trading days before and two trading days after
the merger was announced. Additionally, we issued 11,623,236 roll-over stock
warrants in exchange for Pathmark's 2005 Series A and Series B warrants under
the Yucaipa Warrant Agreement to the Yucaipa Companies LLC ("Yucaipa")
45
investors. The number of warrants issued was computed based on the number of
Pathmark warrants outstanding on November 30, 2007 totaling 25,106,350 using the
conversion factor of 0.46296. The Series A warrants are exercisable at $18.36
and the Series B warrants are exercisable at $32.40. The 2005 Series A and
Series B warrants are valued using the price of A&P common stock of $30.05 per
common share, the quoted market price of A&P stock on November 30, 2007. These
instruments will be accounted for as a liability and will be marked to market at
each balance sheet date.
The purchase price paid for the acquisition of Pathmark is as follows:
Equity issued to Pathmark common stock holders $ 203.8
Issuance to Pathmark option holders 11.2
Issuance to Pathmark 2005 warrant holders 177.0
Issuance to Pathmark 2000 warrant holders 1.1
------------
Total equity considerations $ 393.1
Cash paid to redeem Pathmark debt 466.0
Cash paid to Pathmark common stockholders at $9 per share 470.8
Cash paid to Pathmark option, restricted stock and restricted
stock unit holders 23.3
Cash paid to date for transaction fees, excluding financing fees 51.9
------------
Total cash consideration $ 1,012.0
------------
Total consideration $ 1,405.1
============
The acquisition of Pathmark was funded by restricted cash on hand, temporary
bridge financing arrangements and the issuance of equity securities.
On December 3, 2007, we entered into a new $675 million Credit Agreement (the
"ABL Facility") with Bank of America, N.A., and a $370 million Senior Secured
Bridge Credit Agreement (the "Bridge Loan Facility") with Banc of America
Securities LLC, Bank of America, N.A. and Bank of America Bridge LLC, Lehman
Brothers Commercial Bank, Lehman Brothers Inc. and Lehman Commercial Paper Inc.
The ABL Facility provides for a five-year term loan of $82.9 million and a
five-year revolving credit facility of $592.1 million. The Bridge Loan Facility,
which was subsequently refinanced, provided for a term loan of $370 million that
initially matures on December 3, 2008, after which time, subject to the
satisfaction of certain conditions, the loans then outstanding will either
continue as term loans or be exchanged for exchange notes, in each case having a
maturity of December 3, 2015. In connection with the new financing, we paid
$10.7 million and $20.6 million in financing fees for the ABL Facility and the
Bridge Loan Facility, respectively.
We used our restricted cash on hand and borrowings under the ABL Facility and
the Bridge Loan Facility to fund the acquisition, terminate our existing
Revolver which had outstanding borrowings of $11.3 million, terminate Pathmark's
obligation under their revolver and term loan of $114.0 million and to fund
$375.5 million for the payment of Pathmark's Senior Subordinated Notes with a
face value of $350 million due 2012. At the close of business on December 3,
2007, we had $200.0 million in outstanding borrowings under the ABL Facility.
To pay down our temporary financing as discussed above, on December 18, 2007, we
completed a public offering and issued $165 million 5.125% convertible senior
notes due 2011 and $255 million 6.75% convertible senior notes due 2012. The
2011 notes are not redeemable at our option at any time. The 2012
46
notes are redeemable at our option on or after December 15, 2010, at a
redemption price of 102.70% and on or after December 15, 2011, at a redemption
price of 101.35%. The initial conversion price of the 2011 notes is $36.40
representing a 30.0% premium to the offering price of $28.00 and the initial
conversion price of the 2012 notes is $37.80 representing a 35.0% premium to the
offering price of $28.00. The principal amount of these notes are convertible
into shares of our stock, cash, or a combination of stock and cash at our
option. In connection with this offering, we entered into convertible note hedge
and warrant transactions with financial institutions that are affiliates of the
underwriters of the notes to increase the effective conversion price of the
notes. We also entered into share lending agreements with affiliates of the
underwriters to lend such affiliates up to 11,278,988 shares of our common
stock. Pursuant to these agreements, we loaned 8,134,002 shares of our stock to
these entities who then sold 6,300,752 shares to the public in a public
offering, which was consummated on December 18, 2007. We did not receive any
proceeds from the sale of these shares other than a nominal lending fee.
On December 27, 2007, in order to facilitate the syndication of the ABL Facility
under current market conditions, we entered into an Amended and Restated Credit
Agreement (the "Credit Agreement"). Part of the revolving commitments were
restructured as a $50 million term loan collateralized by certain real estate
assets and the applicable margin on credit extensions was increased.
The application of purchase accounting under SFAS 141 requires that the purchase
price paid is allocated to the tangible and identifiable intangible assets
acquired and liabilities assumed on the basis of their fair values on the
transaction date. The allocation of the purchase price and its impact on the
Consolidated Statements of Operations may differ depending on the final fair
values assigned to amortizing assets and liabilities and their related actual
remaining useful lives, including the following categories of intangible assets
and liabilities:
- Favorable/unfavorable leases
- Favorable/unfavorable contracts
- Benefit plan obligations
- Pharmacy scripts
- Customer relationships
The allocation of the purchase price to assets which will not be amortized may
also impact classification on the balance sheet depending on the final fair
values assigned, including the following categories of intangible assets:
- Trade name
- Goodwill
47
Under the purchase method of accounting, the assets and liabilities of Pathmark
were recorded at their respective fair values at the date of acquisition,
December 3, 2007. Simultaneously, we recorded a preliminary amount to goodwill
of approximately $570 million. We have determined that the Pathmark trade name
has an infinite life, and accordingly, is not subject to amortization. We have
evaluated the preliminary third-party valuations of property, net, intangible
assets, and certain other assets and liabilities. Because this transaction was
completed subsequent to our quarter end, the values of certain assets and
liabilities are based on preliminary valuations and are subject to adjustment as
additional information is obtained. Such additional information includes, but is
not limited to: valuations and physical counts of property and inventory and the
involuntary termination of employees. Changes to the valuation of property may
result in adjustments to the fair value of certain identifiable intangible
assets acquired, and when finalized, material adjustments to goodwill may
result.
The following table summarizes the preliminary estimated fair values of the
Pathmark assets acquired and liabilities assumed at the date of acquisition:
Current assets $ 355.4
Property, net 1,071.5
Other assets 300.9
--------------
Total assets acquired $ 1,727.8
Current liabilities (306.6)
Long-term debt (1.0)
Long-term obligations under capital leases (163.7)
Other non-current liabilities (419.6)
--------------
Total liabilities assumed $ (890.9)
--------------
Net assets acquired $ 836.9
==============
The preliminary amount of goodwill of approximately $570 million resulting from
the Pathmark acquisition is assigned to our Northeast segment. The purchased
goodwill is not deductible for tax purposes.
On August 14, 2007, Pathmark entered into a leasehold assignment contract for
the sale of its leasehold interests in one of its stores with CPS Operating
Company LLC, a Delaware limited liability company ("CPS"). Pursuant to the terms
of the agreement, Pathmark was to receive $87 million for sale of the lease and
was to have assigned and transferred to CPS all of Pathmark's interest in the
lease and CPS was to have assumed all of the duties and obligations of Pathmark
under the lease. CPS deposited $6 million in escrow as a deposit against the
purchase price for the lease, which is non-refundable to CPS, except as
otherwise expressly provided in the agreement. The sale of the lease was
scheduled to close on December 28, 2007. On December 27, 2007, CPS issued a
notice to Pathmark terminating the agreement for reason of Pathmark's purported
breach of the agreement, which, if proven, would require the return of the
escrow. Pathmark is disputing the validity of CPS's notice of termination as
Pathmark believes the CPS's position is without merit. Because Pathmark is
challenging the validity of CPS's December 27, 2007 notice of termination,
Pathmark issued its own notice to CPS on December 31, 2007, asserting CPS's
breach of the agreement as a result of their failure to close on December 28,
2007. CPS's breach, if proven, would entitle Pathmark to keep the escrow. Both
parties have taken legal action to obtain the $6 million deposit held in escrow.
48
On November 5, 2007, the Superior Court of the State of New Jersey, Middlesex
County, approved the negotiated settlement of the two putative class action
complaints that were filed in New Jersey State court on March 6, 2007, and March
12, 2007, and subsequently consolidated on June 15, 2007 and amended on July 16,
2007 (Superior Court of the State of New Jersey, Middlesex County, Civil Action
No. C-111-07), alleging, inter alia, that the preliminary joint prospectus/proxy
statement regarding the transaction between A&P and Pathmark included
insufficient disclosures, breach of fiduciary duty by the directors of Pathmark,
and aiding and abetting the breach of that duty by Pathmark and A&P. Pursuant to
the negotiated settlement, the litigation was dismissed, releases were
exchanged, Pathmark and A&P made certain disclosures in the definitive joint
proxy statement/prospectus regarding the transaction between A&P and Pathmark
and, in connection with the acquisition of Pathmark subsequent to our third
quarter end, we agreed to pay plaintiffs' attorneys' fees and expenses in the
aggregate amount of $1.3 million.
As discussed in Note 10 - Stock Based Compensation, upon closing of the Pathmark
transaction and the achievement of other terms as described under the
Integration Program, approximately $10.1 million of additional unrecognized fair
value compensation expense relating to the performance restricted stock units
granted on June 15, 2007 and August 7, 2007 is expected to be recognized over
the vesting period through 2010.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION
The following Management's Discussion and Analysis is intended to help the
reader understand the financial position, operating results, and cash flows of
The Great Atlantic and Pacific Tea Company, Inc. It should be read in
conjunction with our financial statements and the accompanying notes ("Notes").
It discusses matters that Management considers relevant to understanding the
business environment, financial position, results of operations and our
Company's liquidity and capital resources. These items are presented as follows:
- Basis of Presentation - a discussion of our Company's results during the
12 and 40 weeks ended December 1, 2007 and December 2, 2006.
- Overview - a general description of our business; the value drivers of our
business; measurements; opportunities; challenges and risks; and
initiatives.
- Outlook - a discussion of certain trends or business initiatives for the
remainder of fiscal 2007 that Management wishes to share with the reader
to assist in understanding the business.
- Review of Continuing Operations and Liquidity and Capital Resources--a
discussion of results for the 12 weeks ended December 1, 2007 compared to
the 12 weeks ended December 2, 2006; results for the 40 weeks ended
December 1, 2007 compared to the 40 weeks ended December 2, 2006; current
and expected future liquidity; and the impact of various market risks on
our Company.
- Critical Accounting Estimates--a discussion of significant estimates
made by Management.
- Impact of New Accounting Pronouncements - a discussion of authoritative
pronouncements that have been or will be adopted by our Company.
- Market Risk - a discussion of the impact of market changes on our
consolidated financial statements.
49
BASIS OF PRESENTATION
The accompanying consolidated financial statements of The Great Atlantic &
Pacific Tea Company, Inc. for the 12 and 40 weeks ended December 1, 2007 and
December 2, 2006 are unaudited and, in the opinion of management, contain all
adjustments that are of a normal and recurring nature necessary for a fair
statement of financial position and results of operations for such periods. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in our revised
Fiscal 2006 Annual Report on Form 8-K dated October 24, 2007. Interim results
are not necessarily indicative of results for a full year.
The consolidated financial statements include the accounts of our Company and
all subsidiaries.
OVERVIEW
The Great Atlantic & Pacific Tea Company, Inc., based in Montvale, New Jersey,
operates conventional supermarkets, combination food and drug stores and
discount food stores in 8 U.S. states and the District of Columbia. Our
Company's business consists strictly of our retail operations, which totaled 322
stores as of December 1, 2007.
For the 12 and 40 weeks ended December 1, 2007, we operated in two reportable
segments: the Northeast and our investment in Metro, Inc. Our Northeast segment
is comprised of retail supermarkets and all corporate related charges. Our
investment in Metro, Inc. represents our economic interest in Metro, Inc. The
criteria necessary to classify the Midwest and Greater New Orleans area as
discontinued have been satisfied and as such, these operations have been
reclassified in our Consolidated Statements of Operations for the 12 and 40
weeks ended December 1, 2007 and December 2, 2006.
RECENT ANNOUNCEMENTS
On March 5, 2007, our Company announced that we have reached a definitive merger
agreement with Pathmark Stores, Inc. in which we will acquire Pathmark Stores,
Inc., ("Pathmark") for $1.4 billion in cash, stock, and debt assumption or
retirement.
On November 27, 2007, our Company announced that the Federal Trade Commission
("FTC") had accepted a proposed consent agreement relating to our acquisition of
Pathmark. Further, on December 3, 2007, we completed our acquisition of
Pathmark. Pathmark is a regional supermarket chain with supermarkets in the New
York, New Jersey and Philadelphia metropolitan areas. The terms of the consent
agreement, as discussed in Note 15 - Subsequent Events, requires us to divest
six stores located in the state of New York. We have entered into definitive
agreements to sell all of the stores included in the consent agreement and have
received FTC approval on these divestitures.
Under the merger agreement, each share of Pathmark common stock outstanding was
converted into 0.12963 shares of A&P common stock (together with cash in lieu of
fractional shares) and $9.00 in cash. We issued 6,781,067 shares of A&P common
stock and paid $470.8 million to Pathmark common stockholders based on the
number of shares of unrestricted Pathmark common stock outstanding, less shares
of restricted stock and shares held in treasury on November 30, 2007, of
52,310,959.
We issued 1,107,156 roll-over stock options in exchange for Pathmark options
granted prior to June 9, 2005 that have exercise prices greater than or equal to
$12.90, the quoted market price of Pathmark common stock on November 30, 2007,
the last trading day before the closing date of the merger on December 3, 2007.
The underlying stock price at the closing date of the merger was calculated
using a ratio of the quoted
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closing market price for the Pathmark common stock on the merger closing date.
In determining the purchase price, the options are valued using a Black-Scholes
valuation model and a market price of $12.92, the average quoted closing market
price of Pathmark common stock for the two trading days prior to the closing
date and the closing date.
We also assumed 5,294,118 of outstanding Pathmark 2000 warrants. Upon exercise
at the price of $22.31, each warrant will entitle the holder to receive 0.12963
shares of A&P common stock and $9.00 in cash. In determining the purchase price,
the 2000 warrants are valued using a Black-Scholes valuation model using the
price of A&P common stock of $32.08 per common share, the average quoted market
price of A&P common stock for two trading days before and two trading days after
the merger was announced. Additionally, we issued 11,623,236 roll-over stock
warrants in exchange for Pathmark's 2005 Series A and Series B warrants under
the Yucaipa Warrant Agreement to the Yucaipa Companies LLC ("Yucaipa")
investors. The number of warrants issued was computed based on the number of
Pathmark warrants outstanding on November 30, 2007 totaling 25,106,350 using the
conversion factor of 0.46296. The Series A warrants are exercisable at $18.36
and the Series B warrants are exercisable at $32.40. The 2005 Series A and
Series B warrants are valued using the price of A&P common stock of $30.05 per
common share, the quoted market price of A&P stock on November 30, 2007. These
instruments will be accounted for as a liability and will be marked to market at
each balance sheet date.
The purchase price paid for the acquisition of Pathmark is as follows:
Equity issued to Pathmark common stock holders $ 203.8
Issuance to Pathmark option holders 11.2
Issuance to Pathmark 2005 warrant holders 177.0
Issuance to Pathmark 2000 warrant holders 1.1
------------
Total equity considerations $ 393.1
Cash paid to redeem Pathmark debt 466.0
Cash paid to Pathmark common stockholders
at $9 per share 470.8
Cash paid to Pathmark option, restricted stock
and restricted stock unit holders 23.3
Cash paid to date for transaction fees,
excluding financing fees 51.9
------------
Total cash consideration $ 1,012.0
------------
Total consideration $ 1,405.1
============
The acquisition of Pathmark was funded by restricted cash on hand, temporary
bridge financing arrangements and the issuance of equity securities.
On April 24, 2007, based upon unsatisfactory operating trends and the need to
devote resources to our expanding Northeast core business, our Company announced
negotiations for the sale of our non-core stores within our Midwest operations,
including inventory related to these stores. Sale transactions for these stores
have been completed. Further, our Company has ceased sales operations in all
stores as of July 7, 2007. In connection with the shutdown of these operations,
we recorded net occupancy costs of $1.8 million and $60.7 million during the 12
and 40 weeks ended December 1, 2007, respectively, for closed stores and
warehouses not sold. As we continue to negotiate lease terminations as well as
sublease some of these locations, these estimates may require adjustment in
future periods.
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On May 30, 2007, our Company announced advanced negotiations for the sale of our
non-core stores located within the Greater New Orleans area, including inventory
related to these stores. Sale transactions for these stores have been completed.
Further, our Company has ceased sales operations in all stores as of November 1,
2007. In connection with the shutdown of these operations, we recorded net
occupancy costs of $1.6 million during the 12 and 40 weeks ended December 1,
2007.
OPERATING RESULTS
A&P's transformation and operating improvement moved forward in the third
quarter of fiscal 2007, behind ongoing strategic, operating, merchandising,
store development and cost control initiatives.
Our Company completed its strategic divestiture of non-core operations, which
resulted in the concentration of operations and future development plans in our
Northeast markets. Having closed and/or sold all Midwest operations in the
second quarter, we moved on to complete the divestiture of stores in the Greater
New Orleans area early in the third quarter.
The resolution of those initiatives and the completion of our acquisition of
Pathmark Stores Inc. early in the fourth quarter, effectively completed our
Company's strategic transformation initiative, which began in 2005 with the sale
of A&P Canada and subsequent executive management changes. With the addition of
the Pathmark operations, A&P is positioned to achieve sustainable profitability
when the integration of Pathmark's business is completed.
With divestiture of non-core operations and acquisition of Pathmark completed,
A&P now has:
- Decisive market share leadership in metropolitan New York and New Jersey,
and greater share in our Superfresh markets.
- A clearly defined and demographically targeted store format strategy.
- A comprehensive plan in place to achieve all identified synergy savings
through consolidation of the Pathmark business.
- The right cost model and solid financial and investment platform.
- Experienced management team, enhanced by the addition of approximately 125
key management personnel from the Pathmark organization.
Alongside the conclusion of the strategic transformation, we maintained the
ongoing improvement of operating and merchandising execution, which combined
with the growing impact of our new Fresh stores and remodels to drive continued,
strong year-over-year sales improvement in our Company's Northeast operations in
the third quarter.
Accordingly, ongoing improvement from core operations was driven by the
continued sales improvement in those markets, more consistent operating
discipline and cost controls; margin improvement associated with our ongoing
fresh store development and positive results in our discount Food Basics
operations.
We continued the conversion of suitable conventional locations to the successful
fresh format, completing two projects during the third quarter. In addition to
increased volume and customer traffic, the emphasis on
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fresh category distribution in those stores continues to improve margins,
underlining its top and bottom line growth potential.
The discount Food Basics operations again returned sound results, as they
provided customers in certain markets with an excellent value alternative. In
combination with the mainstream Fresh stores and gourmet Fine Food concept that
continued to evolve in New York, this development stream continues to advance
the multi-tier marketing strategy initiated in 2005.
The innovation of A&P's marketing profile moved forward with our agreement with
Starbucks to add licensed cafes in our stores, with five locations opening in
the third quarter, and eventual plans to open approximately 100 in-store
Starbucks units. In addition, we completed the acquisition of Best Cellars, a
New York-based wine retailer with six locations, whose unique wine-selling
concepts will be used to enhance A&P's freestanding and in-store wine, beer and
liquor business.
In summary, strategic accomplishments for the third quarter included the
following:
- Completed strategic restructuring, with divestiture of non-core businesses
and acquisition of Pathmark Stores.
- Continued strong sales trends in core Northeast operating markets.
- Earnings momentum in Northeast operations.
- Two conversions to the Fresh store concept, generating volume and margin
improvement.
- Improved contribution from discount Food Basics and Food Emporium
operations.
- Preparation of comprehensive Pathmark integration strategy.
OUTLOOK
Management's objectives for the fourth quarter of fiscal 2007 are to progress
further toward operating profitability in the existing core Northeast business,
by: continuing operating and merchandising improvements behind established
strategies; maintaining cost control and reduction disciplines throughout the
business; and ensuring the continuity of Pathmark store operations, with
emphasis on customer communication and retention, as the overall integration of
that business proceeds.
Chief among the pre-existing corporate and retail strategies in place are the
ongoing improvement of merchandising and operating performance, the execution of
capital improvement projects for maximum return, and general adherence to cost
control disciplines.
Key elements are:
- Continued development of merchandising, promotion and pricing strategies
to drive profitable sales growth.
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- Execute core market capital plan for conversion of conventional locations
to fresh or discount formats, fine-tune and monitor gourmet format
development.
- Ongoing disposition of closed store leaseholds.
The comprehensive plan for the integration of Pathmark operations is designed to
achieve:
- Continuity of all retail operations during integration process.
- Efficient consolidation of headquarters personnel and support functions at
present A&P headquarters in Montvale.
- Timely achievement of significant synergies identified as result of
merging the two businesses.
- Communication to both organizations regarding process and timetable for
integration and related changes.
- Consumer communication regarding the continuation of both the A&P-operated
and Pathmark banners and store formats, and related marketing and
promotional efforts.
Overall, the balance of fiscal 2007 will continue to reflect both continuity and
change, as management focuses on sustaining the improvement of our A&P,
Waldbaum's, Superfresh, Food Basics and Food Emporium operations - and executing
a seamless transition of Pathmark operations into the Company, to maintain
retail continuity and ensure the capture of all identified financial synergies
as scheduled over the next 18 to 24 months.
Various risk factors could cause us to fail to achieve these goals. These
include, among others, the following:
- Our retail food business and the grocery retailing industry continues to
experience fierce competition from mass merchandisers, warehouse clubs,
drug stores, convenience stores, discount merchandisers, dollar stores,
restaurants, other retail chains, nontraditional competitors and emerging
alternative formats in the markets where we have retail operations.
Competition with these outlets is based on price, store location,
advertising and promotion, product mix, quality and service. Some of these
competitors may have greater financial resources, lower merchandise
acquisition costs and lower operating expenses than we do, and we may be
unable to compete successfully in the future. An overall lack of inflation
in food prices and increasingly competitive markets have made it difficult
generally for grocery store operators to achieve comparable store sales
gains. Because sales growth has been difficult to attain, our competitors
have attempted to maintain market share through increased levels of
promotional activities and discount pricing, creating a more difficult
environment in which to consistently increase year-over-year sales.
Price-based competition has also, from time to time, adversely affected
our operating margins. Our continued success is dependent upon our ability
to effectively compete in this industry and to reduce operating expenses,
including managing health care and pension costs contained in our
collective bargaining agreements. The competitive practices and pricing in
the food industry generally and particularly in our principal markets may
cause us to reduce our prices in order to gain or maintain our market
share of sales, thus reducing margins.
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- Our in-store pharmacy business is also subject to intense competition. In
particular, an adverse trend for drug retailing has been significant
growth in mail-order and internet-based prescription processors.
Pharmacies are exposed to risks inherent in the packaging and distribution
of pharmaceuticals and other healthcare products. In addition, the
conversion of various prescription drugs to over-the-counter medications,
the withdrawal of certain drugs from the market and changes in third party
reimbursement levels for prescription drugs, including changes in Medicare
Part D or state Medicaid programs, may have a material adverse effect on
our business. Failure to properly adhere to certain government
regulations, local registrations, applicable Medicare and Medicaid
regulations and prohibitions against paid referrals of patients could
result in the imposition of civil as well as criminal penalties.
- The retail food and food distribution industries, and the operation of our
businesses, specifically in the New York -- New Jersey and Philadelphia
regions, are sensitive to a number of economic conditions and other
factors such as (i.) food price deflation or inflation, (ii.) softness in
local and national economies, (iii.) increases in commodity prices, (iv.)
the availability of favorable credit and trade terms, (v.) changes in
business plans, operations, results and prospects, (vi.) potential delays
in the development, construction or start-up of planned projects, and
(vii.) other economic conditions that may affect consumer buying habits.
Any one or more of these economic conditions can affect our retail sales,
the demand for products we distribute to our retail customers, our
operating costs and other aspects of our business.
- Acts of war, threats of terror, acts of terror or other criminal activity
directed at the grocery or drug store industry, the transportation
industry, or computer or communications systems, could increase security
costs, adversely affect our operations, or impact consumer behavior and
spending as well as customer orders. Other events that give rise to actual
or potential food contamination, drug contamination, or food-borne illness
could have an adverse effect on our operating results.
- We could be adversely affected if consumers lose confidence in the safety
and quality of the food supply chain. Adverse publicity about these types
of concerns, whether or not valid, could discourage consumers from buying
products in our stores. The real or perceived sale of contaminated food
products by us could result in a loss of consumer confidence and product
liability claims, which could have a material adverse effect on our sales
and operations.
- Our operations subject us to various laws and regulations relating to the
protection of the environment, including those governing the management
and disposal of hazardous materials and the cleanup of contaminated sites.
Under some environmental laws, such as the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, also known as CERCLA or
the Superfund law, and similar state statues, responsibility for the
entire cost of cleanup of a contaminated site can be imposed upon any
current or former site owners or operators, or upon any party who sent
waste to the site, regardless of the lawfulness of the original activities
that led to the contamination. From time to time we have been named as one
of many potentially responsible parties at Superfund sites, although our
share of liability has typically been de minimis. Although we believe that
we are currently in substantial compliance with applicable environmental
requirements, future developments such as more aggressive enforcement
policies, new laws or discoveries of unknown conditions may require
expenditures that may have a material adverse effect on our business and
financial condition.
55
- Our capital expenditures could differ from our estimate if development and
remodel costs vary from those budgeted, or if performance varies
significantly from expectations or if we are unsuccessful in acquiring
suitable sites for new stores.
- Our ability to achieve our profit goals will be affected by (i.) our
success in executing category management and purchasing programs that we
have underway, which are designed to improve our gross margins and reduce
product costs while making our product selection more attractive to
consumers, (ii.) our ability to achieve productivity improvements and
reduce shrink in our stores, (iii.) our success in generating efficiencies
in our supporting activities, and (iv.) our ability to eliminate or
maintain a minimum level of supply and/or quality control problems with
our vendors.
- The vast majority of our employees are members of labor unions. While we
believe that our relationships with union leaderships and our employees
are satisfactory, we operate under collective bargaining agreements which
periodically must be renegotiated. In the coming year, we have several
contracts expiring and under negotiation. In each of these negotiations,
rising health care and pension costs will be an important issue, as will
the nature and structure of work rules. We are hopeful, but cannot be
certain, that we can reach satisfactory agreements without work stoppages
in these markets. However, the actual terms of the renegotiated collective
bargaining agreements, our future relationships with our employees and/or
a prolonged work stoppage affecting a substantial number of stores could
have a material effect on our results.
- The amount of contributions made to our pension and multi-employer plans
will be affected by the performance of investments made by the plans and
the extent to which trustees of the plans reduce the costs of future
service benefits.
- Our Company is currently required to acquire a significant amount of our
saleable inventory from one supplier, C&S Wholesale Grocers, Inc. Although
there are a limited number of distributors that can supply our stores, we
believe that other suppliers could provide similar product on reasonable
terms. However, a change in suppliers could cause a delay in distribution
and a possible loss of sales, which would affect operating results
adversely.
- We have estimated our exposure to claims, administrative proceedings and
litigation and believe we have made adequate provisions for them, where
appropriate. Unexpected outcomes in both the costs and effects of these
matters could result in an adverse effect on our earnings.
- The integration of Pathmark's operations will require implementation of
appropriate operations, management and financial reporting systems and
controls. We may experience difficulties in effectively implementing these
and other systems and integrating Pathmark's systems and operations. The
integration of Pathmark will require the focused attention of A&P's
management team, including a significant commitment of their time and
resources. The need for both A&P's and Pathmark's management to focus on
integration matters could have a material and adverse impact on the
revenues and operating results of the combined company. The success of the
merger will depend, in part, on the combined company's ability to realize
the anticipated benefits from combining the businesses of A&P and
Pathmark, including, anticipated annual integration synergies within two
years, through cost reductions in overhead, greater efficiencies,
increased utilization of support facilities and the adoption of mutual
best practices between the two companies. It is possible that the
integration process could result in the loss of key employees, as well as
the disruption of each company's ongoing businesses or inconsistencies in
standards, controls, procedures and
56
policies, any or all of which could adversely affect our ability to
maintain relationships with customers and employees after the merger or to
achieve the anticipated benefits of the merger. These integration matters
could have a material adverse effect on our business.
- We have assumed all of Pathmark's liabilities, including contingent
liabilities, in connection with the merger. If there are unknown Pathmark
obligations, our business could be materially and adversely affected. We
may learn additional information about Pathmark's business that adversely
affects us, such as unknown liabilities, issues relating to internal
controls over financial reporting, issues that could affect our ability to
comply with the Sarbanes-Oxley Act or issues that could affect our ability
to comply with other applicable laws. As a result, we cannot assure you
that the acquisition of Pathmark will be successful or will not, in fact,
harm our business. Among other things, if Pathmark liabilities are greater
than expected, or if there are obligations of which we were not aware of
at the time of completion of the acquisition, our business could be
materially and adversely affected.
- Following the closing of the acquisition of Pathmark, Tengelmann, A&P's
former majority shareholder, owned beneficially and of record a
substantial percentage of our common stock on a fully diluted basis. As a
result of this equity ownership and our stockholder agreement with
Tengelmann, Tengelmann has the power to significantly influence the
results of shareholder votes and the election of our board of directors,
as well as transactions involving a potential change of control of our
Company. Tengelmann may support strategies and directions for our Company
which are in its best interests but which are opposed to shareholder
interests.
- Our substantial indebtedness could impair our financial condition and our
ability to fulfill our debt obligations, including our obligations under
the notes. Our indebtedness could make it more difficult for us to satisfy
our obligations with respect to the notes and our other indebtedness,
which could in turn result in an event of default on the notes or such
other indebtedness, require us to dedicate a substantial portion of our
cash flow from operations to debt service payments, thereby reducing the
availability of cash for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes, impair our
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes, diminish our ability to withstand a downturn in our business,
the industry in which we operate or the economy generally, limit our
flexibility in planning for, or reacting to, changes in our business and
the industry in which we operate, and place us at a competitive
disadvantage compared to certain competitors that have proportionately
less debt. Our ABL facility contains restrictive covenants customary for
facilities of that type which limit our ability to incur additional debt,
pay dividends, grant additional liens, make investments and take other
actions. These restrictions may limit flexibility to undertake future
financings and take other actions. If we are unable to meet our debt
service obligations, we could be forced to restructure or refinance our
indebtedness, seek additional equity capital or sell assets. We may be
unable to obtain financing or sell assets on satisfactory terms, or at
all. In addition, our ABL facility bears interest at a variable rate. If
market interest rates increase, such variable-rate debt will have higher
debt service requirements, which could adversely affect our cash flow.
While we may enter into agreements limiting our exposure to higher
interest rates, any such agreements may not offer complete protection from
this risk.
- Fluctuating fuel costs may adversely affect our operating costs since we
incur the cost of fuel in connection with the transportation of goods from
our warehouse and distribution facilities to our stores. In addition,
operations at our stores are sensitive to rising utility fuel costs due to
the amount
57
of electricity and gas required to operate our stores. We may not be able
to recover these rising utility and fuel costs through increased prices
charged to our customers. Our profitability is particularly sensitive to
the cost of oil. Oil prices directly affect our product transportation
costs and fuel costs due to the amount of electricity and gas required to
operate our stores as well as our utility and petroleum-based supply
costs; including plastic bags for example.
- We are subject to federal, state and local laws and regulations relating
to zoning, land use, environmental protection, work place safety, public
health, community right-to-know, beer and wine sales, pharmaceutical sales
and gasoline station operations. A number of states and local
jurisdictions regulate the licensing of supermarkets, including beer and
wine license grants. In addition, under certain local regulations, we are
prohibited from selling beer and wine in certain of our stores. Employers
are also subject to laws governing their relationship with employees,
including minimum wage requirements, overtime, working conditions,
disabled access and work permit requirements. Compliance with these laws
could reduce the revenue and profitability of our supermarkets and could
otherwise adversely affect our business, financial condition or results of
operations. In addition, any changes in these law or regulations could
significantly increase our compliance costs and adversely affect our
results of operations, financial condition and liquidity.
- We have large, complex information technology systems that are important
to business operations. We could encounter difficulties developing new
systems and encounter difficulties maintaining, upgrading or securing our
existing systems. Such difficulties could lead to significant expenses or
losses due to disruption in our business operations.
- Our articles of incorporation permit our board of directors to issue
preferred shares without first obtaining shareholder approval. If we
issued preferred shares, these additional securities may have dividend or
liquidation preferences senior to our common stock. If we issue
convertible preferred shares, a subsequent conversion may dilute the
current common shareholders' interest. Issuance of such preferred stock
could adversely affect the price of our common stock.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward-looking statements made
by us or our representatives.
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RESULTS OF CONTINUING OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
Our consolidated financial information presents the results related to our
operations of discontinued businesses separate from the results of our
continuing operations. The discussion and analysis that follows focus on
continuing operations. All amounts are in millions, except share and per share
amounts.
12 WEEKS ENDED DECEMBER 1, 2007 COMPARED TO THE 12 WEEKS ENDED DECEMBER 2, 2006
OVERALL
Sales for the third quarter of fiscal 2007 were $1,251.1 million
compared to $1,213.5 million for the third quarter of fiscal 2006; comparable
store sales, which include stores that have been in operation for two full
fiscal years and replacement stores, increased 3.1%. Income from continuing
operations increased from $32.3 million for the third quarter of fiscal 2006 to
$73.1 million for the third quarter of fiscal 2007, due primarily to the gain on
disposition of Metro, Inc. of $106.1 million. Income from discontinued
operations of $8.5 million for the third quarter of fiscal 2006 decreased to a
loss from discontinued operations of $15.8 million for the third quarter of
fiscal 2007 due to the sale and closure of stores in the Midwest and the sale of
our stores in the Greater New Orleans area. Net income per share - basic and
diluted for the third quarter of fiscal 2007 was $1.36 and $1.35, respectively,
compared to net income per share - basic and diluted of $0.98 and $0.97,
respectively, for the third quarter of fiscal 2006.
12 Weeks 12 Weeks
Ended Ended Favorable /
Dec. 1, 2007 Dec. 2, 2006 (Unfavorable) % Change
------------ ------------ ------------- --------
Sales $ 1,251.1 $ 1,213.5 $ 37.6 3.1%
Increase (decrease) in comparable store sales 3.1% (0.2%) NA NA
Income from continuing operations 73.1 32.3 40.8 >100.0%
(Loss) income from discontinued operations (15.8) 8.5 (24.3) >100.0%
Net income 57.3 40.7 16.6 40.8%
Net income per share - basic 1.36 0.98 0.38 38.8%
Net income per share - diluted 1.35 0.97 0.38 39.2%
SALES
Sales in the Northeast for the third quarter of fiscal 2007 of $1,251.1 million
increased $37.6 million or 3.1% from sales of $1,213.5 million for third quarter
of fiscal 2006.
The following details the dollar impact of several items affecting the increase
(decrease) in sales by reportable operating segment from the third quarter of
fiscal 2006 to the third quarter of fiscal 2007:
Impact of Impact of Comparable
New Closed Store
Stores Stores Sales Other Total
--------- --------- ---------- ----- -----
Northeast $ 18.6 $ (14.1) $ 37.2 $(4.1) $37.6
The increase in the Northeast sales was primarily attributable to the opening or
re-opening of 19 new stores since the beginning of the third quarter of fiscal
2006, of which 10 were opened or re-opened in fiscal 2007, increasing sales by
$18.6 million and the increase in comparable store sales for the third quarter
of fiscal 2007 of $37.2 million or 3.1% as compared with the third quarter of
fiscal 2006. This increase was partially
59
offset by the closing of 11 stores since the beginning of the third quarter of
fiscal 2006, of which 5 were closed in fiscal 2007, decreasing sales by $14.1
million along with the decrease in sales relating to the expiration of an
information technology services agreement with Metro, Inc. of $4.1 million.
Included in the 19 stores opened since the beginning of the third quarter of
fiscal 2006 were 6 Best Cellars stores purchased during the third quarter of
fiscal 2007 and 6 Clemens Markets stores purchased from C&S Wholesale Grocers,
Inc. during the third quarter of fiscal 2006.
Average weekly sales per supermarket in the Northeast were approximately
$348,800 for the third quarter of fiscal 2007 versus $336,100 for the
corresponding period of the prior year, an increase of 3.8% primarily due to
positive comparable store sales.
GROSS MARGIN
Gross margin in the Northeast of $381.7 million decreased 45 basis points as a
percentage of sales to 30.51% for the third quarter of fiscal 2007 from gross
margin of $375.7 million or 30.96% for the third quarter of fiscal 2006
primarily due to the decrease in sales relating to the expiration of an
information technology services agreement with Metro, Inc. of $4.1 million (34
basis points). We believe the impact on margin for changes in costs and special
reductions was not significant.
The following table details the dollar impact of several items affecting the
gross margin dollar increase (decrease) from the third quarter of fiscal 2006 to
the third quarter of fiscal 2007:
Sales Volume Gross Margin Rate Total
------------ ----------------- -----
Northeast $ 11.7 $ (5.7) $ 6.0
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
Store operating, general and administrative expense ("SG&A") in the Northeast
was $402.8 million or 32.20% as a percentage of sales for the third quarter of
fiscal 2007 compared to $381.4 million or 31.43% as a percentage of sales for
the third quarter of fiscal 2006.
Included in SG&A for the third quarter of fiscal 2007 were certain charges as
follows:
- costs relating to the closing of our owned warehouses in Edison, New Jersey
and Bronx, New York of $0.3 million (2 basis points) that were not sold as
part of the sale of our U.S. distribution operations and some warehouse
facilities and related assets to C&S Wholesale Grocers, Inc. as discussed
in Note 8 - Asset Disposition Initiatives;
- net real estate activity of $4.4 million (35 basis points); and
- Pathmark acquisition related costs of $4.4 million (35 basis points).
SG&A for the third quarter of fiscal 2006 included certain charges as follows:
- costs relating to the closing of our owned warehouses in Edison, New Jersey
and Bronx, New York of $0.7 million (6 basis points) that were not sold as
part of the sale of our U.S. distribution operations and some warehouse
facilities and related assets to C&S Wholesale Grocers, Inc. as discussed
in Note 8 - Asset Disposition Initiatives;
- costs relating to the consolidation of our operating offices in line with
our smaller operations in the Northeast of $0.2 million (2 basis points);
- costs relating to a voluntary labor buyout program in the South Region of
$0.2 million (2 basis points).
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Partially offset by:
- reversal of occupancy related costs of $3.7 million (31 basis points) due
to changes in our estimates of future costs for stores closed as part of
our asset disposition initiatives as discussed in Note 8 - Asset
Disposition Initiatives; and
- net real estate activity of $4.5 million (36 basis points) during the
third quarter of fiscal 2006.
Excluding the items listed above, SG&A for our Northeast increased $5.2 million
or decreased 54 basis points as a percentage of sales during the third quarter
of fiscal 2007 as compared to the third quarter of fiscal 2006 primarily due to
a decrease in labor costs as a percentage of sales of 27 basis points, a
decrease in store operating costs of 11 basis points and a decrease in corporate
and banner administrative expenses of 26 basis points offset by an increase in
occupancy costs of 12 basis points.
During the 12 weeks ended December 1, 2007 and December 2, 2006, we recorded
impairment losses on long-lived assets due to closure or conversion in the
normal course of business of $2.5 million and $1.0 million, respectively.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
If current operating levels do not continue to improve, there may be additional
future impairments on long-lived assets, including the potential for impairment
of assets that are held and used.
GAIN ON DISPOSITION OF METRO, INC.
During the 12 weeks ended December 1, 2007, we sold the remaining shares of our
holdings in Metro, Inc. resulting in a gain of $106.1 million. There were no
such gains during the 12 weeks ended December 2, 2006.
INTEREST EXPENSE
Interest expense of $14.5 million for the third quarter of 2007 decreased from
the prior year amount of $15.3 million primarily due to (i.) a decrease in
interest expense of $0.6 million as our 7.75% Notes due April 15, 2007 matured
and were paid in full during the first quarter of fiscal 2007 and (ii.) a
decrease in interest expense of $1.6 million due to decreased borrowings on our
revolving lines of credit partially offset by (ii.) additional landlord
allowances received that are considered debt financing resulting in an increase
in interest expense of $1.1 million.
EQUITY IN EARNINGS OF METRO, INC.
We used the equity method of accounting to account for our investment in Metro,
Inc. through March 13, 2007, on the basis that we exerted significant influence
over substantive operating decisions made by Metro, Inc. through our membership
on Metro, Inc.'s Board of Directors and its committees and through an
information technology services agreement with Metro, Inc. During the 12 weeks
ended December 1, 2007 and December 2, 2006, we recorded nil and $11.0 million,
respectively, in equity earnings relating to our equity investment in Metro,
Inc.
Beginning March 13, 2007, as a result of the sale of 6,350,000 shares of Metro,
Inc., our Company recorded our investment in Metro, Inc. under SFAS 115 as a
cost investment for the 12 weeks ended December 1,
61
2007 on the basis that we no longer exert significant influence over substantive
operating decisions made by Metro, Inc. In accordance with SFAS 115, we recorded
dividend income of $1.4 million based on Metro, Inc.'s dividend declaration on
September 25, 2007 and included this amount in "Interest and dividend income" on
our Consolidated Statements of Operations for the third quarter ended December
1, 2007. On November 26, 2007, in connection with our agreement to acquire
Pathmark Stores, Inc., our Company sold the remaining 11,726,645 shares of our
holdings in Metro, Inc. After these sales, our Company no longer holds Class A
subordinate shares of Metro, Inc. as of the balance sheet date.
INCOME TAXES
The provision for income taxes from continuing operations for the third quarter
of fiscal 2007 was $1.8 million compared to a benefit from income taxes of $41.2
million for the third quarter of fiscal 2006. Consistent with the prior year, we
continue to record a valuation allowance in an amount that appropriately reduces
our net deferred tax asset to reflect our assessment of its realizability.
The effective tax rate on continuing operations of 2.3% for the 12 weeks ended
December 1, 2007 varied from the statutory rate of 35% primarily due to state
and local income taxes and a decrease to our valuation allowance as a result of
the utilization of loss carryforwards that were not previously tax benefited.
The effective tax rate on continuing operations of 461.6% for the 12 weeks ended
December 2, 2006 varied from the statutory rate of 35% primarily due to a
reduction in our valuation allowance and taxes not being provided on
undistributed earnings of Metro, Inc.
DISCONTINUED OPERATIONS
Beginning in the fourth quarter of fiscal year 2002 and in the early part of the
first quarter of fiscal 2003, we decided to sell our operations located in
Northern New England and Wisconsin. These asset sales are now complete. However,
our Company continues to pay occupancy costs for operating leases on closed
locations.
On April 24, 2007, based upon unsatisfactory operating trends and the need to
devote resources to our expanding Northeast core business, our Company announced
negotiations for the sale of our non-core stores within our Midwest operations,
including inventory related to these stores. Sale transactions for these stores
have been completed. Further, our Company has ceased sales operations in all
stores as of July 7, 2007. In connection with the shutdown of these operations,
we recorded net occupancy costs of $1.8 million during the 12 weeks ended
December 1, 2007 for closed stores and warehouses not sold. As we continue to
negotiate lease terminations as well as sublease some of these locations, these
estimates may require adjustment in future periods.
On May 30, 2007, our Company announced advanced negotiations for the sale of our
non-core stores located within the Greater New Orleans area, including inventory
related to these stores. Sale transactions for these stores have been completed.
Further, our Company has ceased sales operations in all stores as of November 1,
2007. In connection with the shutdown of these operations, we recorded net
occupancy costs of $1.6 million during the 12 weeks ended December 1, 2007.
The loss from operations of discontinued businesses, net of tax, for the third
quarter of fiscal 2007 of $13.5 million decreased from income from operations of
discontinued businesses, net of tax, of $0.7 million for the third quarter of
fiscal 2006 primarily due to (i.) a decrease in income from operations for the
Midwest and the Greater New Orleans for the third quarter of fiscal 2006 to the
third quarter fiscal 2007, and (ii.) additional
62
vacancy costs that were recorded in the third quarter of fiscal 2007 due to the
closure of stores in the Greater New Orleans area. Loss on disposal of
discontinued operations of $2.2 million decreased from gain on disposal of
discontinued operations from the prior year amount of $7.8 million primarily due
to the absence of the gain on sale of an owned warehouse in the Greater New
Orleans area during the third quarter of fiscal 2006.
40 WEEKS ENDED DECEMBER 1, 2007 COMPARED TO THE 40 WEEKS ENDED DECEMBER 2, 2006
OVERALL
Sales for the 40 weeks ended December 1, 2007 were $4,204.6 million compared to
$4,103.4 million for the 40 weeks ended December 2, 2006; comparable store
sales, which includes stores that have been in operation for two full fiscal
years and replacement stores, increased 2.3%. Income from continuing operations
of $131.5 million for the 40 weeks ended December 1, 2007 increased from $23.7
million for the 40 weeks ended December 2, 2006 primarily due to the gain on
disposition of Metro, Inc. Income from discontinued operations of $10.3
million for the 40 weeks ended December 2, 2006 decreased to loss from
discontinued operations of $230.7 million for the 40 weeks ended December 1,
2007 due to the sale and closure of stores in the Midwest and the sale of our
stores in the Greater New Orleans area. Net loss per share - basic for the 40
weeks ended December 1, 2007 was $2.37 compared to a net income per share -
basic of $0.82 for the 40 weeks ended December 2, 2006. Net loss per share -
diluted for the 40 weeks ended December 1, 2007 was $2.34 compared to a net
income per share - diluted of $0.81 for the 40 weeks ended December 2, 2006.
40 weeks 40 weeks
Ended Ended Favorable /
Dec. 1, 2007 Dec. 2, 2006 (Unfavorable) % Change
------------ ------------ ------------- --------
Sales $ 4,204.6 $ 4,103.4 $ 101.2 2.5%
Increase in comparable store sales 2.3% 0.5% NA NA
Income from continuing operations 131.5 23.7 107.8 >100.0%
(Loss) income from discontinued operations (230.7) 10.3 (241.0) >100.0%
Net (loss) income (99.2) 34.1 (133.3) >100.0%
Net (loss) income per share - basic (2.37) 0.82 (3.19) >100.0%
Net (loss) income per share - diluted (2.34) 0.81 (3.15) >100.0%
SALES
Sales in the Northeast for the 40 weeks ended December 1, 2007 of $4,204.6
million increased $101.2 million or 2.5% from sales of $4,103.4 million for 40
weeks ended December 2, 2006.
The following details the dollar impact of several items affecting the increase
(decrease) in sales by reportable operating segment from the 40 weeks ended
December 2, 2006 to the 40 weeks ended December 1, 2007:
Impact of Impact of Comparable
New Closed Store
Stores Stores Sales Other Total
--------- --------- ---------- ----- -------
Northeast $ 63.5 $ (50.4) $ 96.0 $(7.9) $ 101.2
The increase in Northeast sales was primarily attributable to the opening or
re-opening of 20 new stores since the beginning of fiscal 2006, of which 10 were
opened or re-opened in fiscal 2007, increasing sales by $63.5 million and the
increase in comparable store sales for the 40 weeks ended December 1, 2007 of
$96.0 million or 2.3% as compared with the 40 weeks ended December 2, 2006. This
increase was partially offset by to the closing of 13 stores since the beginning
of fiscal 2006, of which 5 were closed in fiscal 2007,
63
decreasing sales by $50.4 million and the decrease in sales relating to the
expiration of an information technology services agreement with Metro, Inc. of
$7.9 million. Included in the 20 stores opened since the beginning of fiscal
2006 were 6 Best Cellars stores purchased during the third quarter of fiscal
2007 and 6 Clemens Markets stores purchased from C&S Wholesale Grocers, Inc.
during the third quarter of fiscal 2006.
Average weekly sales per supermarket for the Northeast were approximately
$350,200 for the 40 weeks ended December 1, 2007 versus $341,900 for the
corresponding period of the prior year, an increase of 2.4% primarily due to the
impact of closing smaller stores and positive comparable store sales.
GROSS MARGIN
Gross margin in the Northeast of $1,303.3 million decreased 7 basis points to
31.00% as a percentage of sales for the 40 weeks ended December 1, 2007 from
$1,274.8 million or 31.07% as a percentage of sales for the 40 weeks ended
December 2, 2006 primarily due to the decrease in sales relating to the
expiration of an information technology services agreement with Metro, Inc. of
$7.9 million (20 basis points). We believe the impact on margin for changes in
costs and special reductions was not significant.
The following table details the dollar impact of several items affecting the
gross margin dollar increase (decrease) from the 40 weeks ended December 2, 2006
to the 40 weeks ended December 1, 2007:
Sales Volume Gross Margin Rate Total
------------ ----------------- -------
Northeast $ 31.4 $ (2.9) $ 28.5
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
SG&A expense in the Northeast was $1,323.4 million or 31.48% as a percentage of
sales for the 40 weeks ended December 1, 2007 as compared to $1,294.5 million or
31.55% as a percentage of sales for the 40 weeks ended December 2, 2006.
Included in SG&A for the 40 weeks ended December 1, 2007 were certain charges as
follows:
- costs relating to a voluntary retirement buyout program of $0.5 million (1
basis point);
- net real estate activity of $7.3 million (17 basis points); and
- Pathmark acquisition related costs of $6.8 million (16 basis points).
Partially offset by:
- reversal of costs relating to the consolidation of our operating offices
in line with our smaller operations of $0.9 million (2 basis points);
- gain on the sale of our owned warehouse in Edison, New Jersey of $13.2
million (31 basis points) that was closed and not sold as part of the sale
of our U.S. distribution operations and some warehouse facilities and
related assets to C&S Wholesale Grocers, Inc. as discussed in Note 8 -
Asset Disposition Initiatives; and
- reversal of occupancy related costs of $1.4 million (3 basis points) due
to changes in our estimates of future costs for stores closed as part of
our asset disposition initiatives as discussed in Note 8 - Asset
Disposition Initiatives.
64
Included in SG&A for the 40 weeks ended December 2, 2006 were certain charges as
follows:
- costs relating to the closing of our owned warehouses in Edison, New
Jersey and Bronx, New York of $5.5 million (13 basis points) that were not
sold as part of the sale of our U.S. distribution operations and some
warehouse facilities and related assets to C&S Wholesale Grocers, Inc. as
discussed in Note 8 - Asset Disposition Initiatives;
- costs relating to the consolidation of our operating offices in line with
our smaller operations of $3.8 million (9 basis points); and
- costs relating to a voluntary labor buyout program in the South Region of
$4.5 million (11 basis points).
Partially offset by:
- net real estate activity of $13.1 million (32 basis points) during the 40
weeks ended December 2, 2006; and
- reversal of occupancy related costs of $1.0 million (3 basis points) due
to changes in our estimates of future costs for stores closed as part of
our asset disposition initiatives as discussed in Note 8 - Asset
Disposition Initiatives.
Excluding the items listed above, SG&A for our Northeast operations as a
percentage of sales decreased 5 basis points during the 40 weeks ended December
1, 2007 as compared to the 40 weeks ended December 2, 2006 primarily due to a
decrease in advertising costs as a percentage of sales of 5 basis points.
During the 40 weeks ended December 1, 2007 and December 2, 2006, we recorded
impairment losses on long-lived assets of $3.6 million and $4.6 million,
respectively, as follows:
40 weeks ended 40 weeks ended
December 1, 2007 December 2, 2006
---------------- ----------------
Impairments due to closure or conversion in the
normal course of business $ 3.6 $ 3.6
Impairments related to our asset disposition initiatives (1) -- 1.0
---------------- ----------------
Total impairments $ 3.6 $ 4.6
================ ================
(1) Refer to Note 8 - Asset Disposition Initiatives
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
If current operating levels do not continue to improve, there may be additional
future impairments on long-lived assets, including the potential for impairment
of assets that are held and used.
GAIN ON DISPOSITION OF METRO, INC.
During the 40 weeks ended December 1, 2007, we sold all shares of our holdings
in Metro, Inc. resulting in a gain of $184.5 million. There were no such gains
during the 40 weeks ended December 2, 2006.
INTEREST EXPENSE
65
Interest expense of $48.8 million for the 40 weeks ended December 1, 2007
decreased from the prior year amount of $50.2 million primarily due to (i.) a
decrease in interest expense of $1.6 million as our 7.75% Notes due April 15,
2007 matured and were paid in full during the first quarter of fiscal 2007 and
(ii.) a decrease in interest expense of $2.3 million due to our decreased
borrowings on our revolving lines of credit partially offset by (iii.)
additional landlord allowances received that are considered debt financing
resulting in an increase in interest expense of $2.3 million.
EQUITY IN EARNINGS OF METRO, INC.
We used the equity method of accounting to account for our investment in Metro,
Inc. through March 13, 2007, on the basis that we exerted significant influence
over substantive operating decisions made by Metro, Inc. through our membership
on Metro, Inc.'s Board of Directors and its committees and through an
information technology services agreement with Metro, Inc. During the 40 weeks
ended December 1, 2007 and December 2, 2006, we recorded $7.9 million and $30.8
million, respectively, in equity earnings relating to our equity investment in
Metro, Inc.
Beginning March 13, 2007, as a result of the sale of 6,350,000 shares of Metro,
Inc., our Company recorded our investment in Metro, Inc. under SFAS 115 as a
cost investment for the 40 weeks ended December 1, 2007 on the basis that we no
longer exert significant influence over substantive operating decisions made by
Metro, Inc. In accordance with SFAS 115, we recorded dividend income of $3.9
million based on Metro, Inc.'s dividend declaration on April 17, 2007, August 8,
2007 and September 25, 2007 and included this amount in "Interest and dividend
income" on our Consolidated Statements of Operations for the 40 weeks ended
December 1, 2007. On November 26, 2007, in connection with our agreement to
acquire Pathmark Stores, Inc., our Company sold the remaining 11,726,645 shares
of our holdings in Metro, Inc. After these sales, our Company no longer holds
Class A subordinate shares of Metro, Inc. as of the balance sheet date.
INCOME TAXES
The provision for income taxes from continuing operations for the 40 weeks ended
December 1, 2007 was $4.3 million compared to the benefit from income taxes from
continuing operations for the 40 weeks ended December 2, 2006 of $55.6 million.
Consistent with prior year, we continue to record a valuation allowance against
our net deferred tax assets.
The effective tax rate on continuing operations of 3.2% for the 40 weeks ended
December 1, 2007 varied from the statutory rate of 35% primarily due to state
and local income taxes and a decrease to our valuation allowance as a result of
the utilization of loss carryforwards that were not previously tax benefited.
The effective tax rate on continuing operations of 174.4% for the 40 weeks ended
December 2, 2006 varied from the statutory rate of 35% primarily due to a
reduction in our valuation allowance and taxes not being provided on
undistributed earnings of Metro, Inc.
DISCONTINUED OPERATIONS
Beginning in the fourth quarter of fiscal year 2002 and in the early part of the
first quarter of fiscal 2003, we decided to sell our operations located in
Northern New England and Wisconsin. These asset sales are now complete. However,
our Company continues to pay occupancy costs for operating leases on closed
locations.
On April 24, 2007, based upon unsatisfactory operating trends and the need to
devote resources to our expanding Northeast core business, our Company announced
negotiations for the sale of our non-core stores
66
within our Midwest operations, including inventory related to these stores. Sale
transactions for these stores have been completed. Further, our Company has
ceased sales operations in all stores as of July 7, 2007. In connection with the
shutdown of these operations, we recorded net occupancy costs of $60.7 million
during the 40 weeks ended December 1, 2007, respectively, for closed stores and
warehouses not sold. As we continue to negotiate lease terminations as well as
sublease some of these locations, these estimates may require adjustment in
future periods.
On May 30, 2007, our Company announced advanced negotiations for the sale of our
non-core stores located within the Greater New Orleans area, including inventory
related to these stores. Sale transactions for these stores have been completed.
Further, our Company has ceased sales operations in all stores as of November 1,
2007. In connection with the shutdown of these operations, we recorded net
occupancy costs of $1.6 million during the 40 weeks ended December 1, 2007.
The loss from operations of discontinued businesses, net of tax, for the 40
weeks ended December 1, 2007 of $179.7 million decreased from income from
operations of discontinued businesses, net of tax, of $2.8 million for the 40
weeks ended December 2, 2006 primarily due to (i.) a decrease in income from
operations for the Greater New Orleans area and the Midwest and (ii.) additional
vacancy costs that were recorded during the 40 weeks ended December 1, 2007 due
to the closure of stores in the Midwest and the Greater New Orleans area. The
loss on disposal of discontinued operations of $51.0 million decreased from gain
on disposal of discontinued operations of $7.6 million for the 40 weeks ended
December 2, 2006 primarily due to impairment losses recorded on the property,
plant and equipment in the Greater New Orleans area and Midwest as we recorded
the assets' fair market value based upon proceeds received less costs to sell.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table presents excerpts from our Consolidated Statements of Cash
Flows:
40 weeks Ended
---------------------------
Dec. 1, 2007 Dec. 2, 2006
------------ ------------
Net cash used in operating activities $ (22,807) $ (42,864)
------------ ------------
Net cash provided by investing activities $ 84,059 $ 52,858
------------ ------------
Net cash used in financing activities $ (78,056) $ (146,915)
------------ ------------
Net cash used in operating activities of $22.8 million for the 40 weeks ended
December 1, 2007 primarily reflected our net loss of $99.2 million, adjusted for
non-cash charges for (i.) depreciation and amortization of $122.6 million, (ii.)
asset disposition initiatives of $120.4 million, (iii.) losses on the disposal
of owned property of $2.5 million, (iv.) loss on disposal of discontinued
operations of $51.0 million, (v.) other property impairments of $3.5 million,
(vi.) other share based awards of $7.3 million, offset by (vii.) our equity in
earnings of Metro, Inc. of $7.9 million, and (viii.) the gain on disposition of
Metro, Inc. of $184.5 million. Further, cash was provided by a decrease in
accounts receivable of $31.9 million, a decrease in inventories of $72.7 million
primarily due to the sale of our Midwest and the Greater New Orleans area
operations offset by an increase in prepaid expenses and other current assets of
$14.2 million, an increase in other assets of $3.1 million, a decrease in
accrued salaries, wages, benefits and taxes of $56.4 million, a decrease in
other non-
67
current liabilities of $42.6 million and a decrease in accounts payable of $27.3
million mainly due to the timing of payments. Refer to Working Capital below for
discussion of changes in working capital items. Net cash flow used in operating
activities of $42.9 million for the 40 weeks ended December 2, 2006 primarily
reflected our net income of $34.1 million, adjusted for non-cash charges for
(i.) depreciation and amortization of $135.8 million, (ii.) asset disposition
initiatives of $3.7 million, partially offset by (iii.) gains on the disposal of
owned property of $17.8 million, (iv.) gain on disposal of discontinued
operations of $7.6 million, (v.) income tax benefit of $61.5 million, and (vi.)
our equity in earnings of Metro, Inc. of $30.8 million. Further cash was used in
operations by a decrease in accounts receivables of $49.8 million offset by an
increase in inventory of $32.4 million, a decrease in accounts payable of $10.2
million, a decrease in accrued salaries, wages and benefits of $30.5 million, a
decrease in other accruals of $57.1 million primarily due to timing and a
decrease in non-current liabilities of $20.4 million due to the utilization of
closed store accruals.
Net cash provided by investing activities of $84.1 million for the 40 weeks
ended December 1, 2007 primarily reflected proceeds from the sale of assets of
$121.6 million ($23.7 million in the Northeast, $53.3 million in the Midwest and
$44.6 million in the Greater New Orleans area), cash received from the sale of
shares of Metro, Inc. of $551.2 million, and net sales of marketable securities
of $20.4 million partially offset by acquisition related expenditures for the
purchase of Pathmark Stores, Inc. of $18.7 million, an increase in restricted
cash of $490.9 million and property expenditures totaling $98.4 million, which
included 4 new supermarkets, 9 major remodels and 2 minor remodels. For the
remainder of fiscal 2007, we have planned capital expenditures of approximately
$48 million, which includes enlarging one supermarket under the Fresh format and
remodeling up to 3 supermarkets to the Fresh format. We currently expect to
close 6 stores during the remainder of fiscal 2007 per our agreement with the
Federal Trade Commission in connection with our acquisition of Pathmark Stores,
Inc. Net cash flow provided by investing activities of $52.9 million for the 40
weeks ended December 2, 2006 primarily reflected proceeds received from the sale
of certain of our assets of $37.5 million, a decrease in restricted cash of
$142.7 million, and net proceeds from maturities of marketable securities of
$82.2 million partially offset by the purchase of 6 Clemens Markets stores from
C&S Wholesale Grocers, Inc. of $24.7 million, and property expenditures totaling
$184.0 million, which included 3 new supermarkets, 26 major remodels and 33
minor remodels.
Net cash used in financing activities of $78.1 million for the 40 weeks ended
December 1, 2007 primarily reflected principal payments on long-term borrowings
of $32.0 million and net principal payments on revolving lines of credit of
$58.7 million offset by net proceeds from long term real estate liabilities of
$6.4 million and proceeds from the exercise of stock options of $6.2 million.
Net cash flow used in financing activities of $146.9 million for the 40 weeks
ended December 2, 2006 primarily reflected principal payments on capital leases
of $4.1 million and dividends paid of $299.1 million partially offset by net
proceeds from revolving lines of credit of $128.5 million, proceeds from the
exercise of stock options of $5.0 million and an increase in book overdrafts of
$19.7 million.
We operate under an annual operating plan which is reviewed and approved by our
Board of Directors and incorporates the specific operating initiatives we expect
to pursue and the anticipated financial results of our Company. Our plan for
fiscal 2007 has been approved and we believe that our present cash resources,
including invested cash on hand and available borrowings from our Revolver and
other sources, are sufficient to meet our needs for the next twelve months.
Profitability, cash flow, asset sale proceeds and timing can be impacted by
certain external factors such as unfavorable economic conditions, competition,
labor relations and fuel and utility costs which could have a significant impact
on cash generation. If our profitability and cash flow do not improve in line
with our plans or if the taxing authorities do not affirm the adequacy of our
Company's Domestic Reinvestment
68
Plan, we anticipate that we would be able to modify the operating plan in order
to ensure that we have appropriate resources.
On March 5, 2007, our Company announced that we have reached a definitive merger
agreement with Pathmark Stores, Inc. in which we will acquire Pathmark Stores,
Inc., ("Pathmark") for $1.4 billion in cash, stock, and debt assumption or
retirement.
On November 27, 2007, our Company announced that the Federal Trade Commission
("FTC") has accepted a proposed consent agreement relating to our acquisition of
Pathmark. Further, on December 3, 2007, we completed our acquisition of
Pathmark. Pathmark is a regional supermarket chain with supermarkets in the New
York, New Jersey and Philadelphia metropolitan areas. The terms of the consent
agreement, as discussed in Note 15 - Subsequent Events, requires us to divest
six stores located in the state of New York. We have entered into definitive
agreements to sell all of the stores included in the consent agreement and have
received FTC approval on these divestitures.
WORKING CAPITAL
We had working capital of $649.5 million at December 1, 2007 compared to working
capital of $190.5 million at February 24, 2007. We had cash and cash equivalents
aggregating $69.4 million at December 1, 2007 compared to $86.2 million at
February 24, 2007. The increase in working capital was attributable primarily to
an increase in restricted cash as a result of the liquidation of our holdings in
Metro, Inc. as discussed in Note 4 - Investment in Metro, Inc. partially offset
by a decrease in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows and a decrease in marketable securities due to their
maturity.
At December 1, 2007, we had $542.1 million of restricted cash which was used to
fund our acquisition of Pathmark on December 3, 2007.
LETTER OF CREDIT AGREEMENT
Our Company has a $250 million Revolving Credit Agreement ("Revolver") with four
lenders enabling us to borrow funds on a revolving basis for working capital
loans and letters of credit.
In March 2007, our Letter of Credit Agreement and Revolver were amended to allow
for the sale of Metro, Inc. shares provided that the net proceeds from such
sales are deposited in a restricted cash account. Refer to Note 4 - Investment
in Metro, Inc. for further discussion regarding the sale of these Metro, Inc.
shares. Also, on October 14, 2007, our Letter of Credit Agreement was amended to
extend the expiration date of the facility from October 14, 2007 to April 14,
2008.
At December 1, 2007 and February 24, 2007, there were $137.6 million and $138.3
million, respectively, in letters of credit outstanding under this agreement.
REVOLVING CREDIT AGREEMENT
During fiscal 2005, we secured a $150 million Revolver with four lenders
enabling us to borrow funds on a revolving basis for working capital loans and
letters of credit. The Revolver includes a $100 million accordion feature which
gives us the ability to increase commitments from $150 million to $250 million.
Effective April 4, 2006, we exercised the accordion option and increased our
commitments to $250 million.
69
Under the terms of this agreement, should availability fall below $25.0 million
and should cash on hand fall below $50.0 million, a borrowing block will be
implemented which provides that no additional loans be made unless we are able
to maintain a minimum consolidated EBITDA covenant on a trailing twelve month
basis. In the event that availability falls below $25.0 million, cash on hand
falls below $50.0 million, and we do not maintain the required minimum EBITDA
covenant, unless otherwise waived or amended, the lenders may, at their
discretion, declare, in whole or in part, all outstanding obligations
immediately due and payable.
The Revolver is collateralized by inventory, certain accounts receivable and
pharmacy scripts. Borrowings under the Revolver bear interest based on LIBOR or
Prime interest rate pricing. This agreement expires in November 2010. At
December 1, 2007 and February 24, 2007, there were no letters of credit
outstanding under this agreement; however, there were $11.3 million and $70.0
million, respectively, in outstanding borrowings under the Revolver. As of
December 1, 2007, after reducing availability for our estimated borrowing base
requirements, we had $214.6 million available under the Revolver. Combined with
cash we held in short-term investments of $2.4 million, we had total cash
availability of $217.0 million at December 1, 2007.
Under the Revolver, we are permitted to pay cumulative cash dividends on common
shares as well as make bond repurchases.
On December 3, 2007, we entered into a new $675 million Credit Agreement (the
"ABL Facility") with Bank of America, N.A., and a $370 million Senior Secured
Bridge Credit Agreement (the "Bridge Loan Facility") with Banc of America
Securities LLC, Bank of America, N.A. and Bank of America Bridge LLC, Lehman
Brothers Commercial Bank, Lehman Brothers Inc. and Lehman Commercial Paper Inc.
The ABL Facility provides for a five-year term loan of $82.9 million and a
five-year revolving credit facility of $592.1 million enabling us to borrow
funds on a revolving basis for working capital loans and letters of credit. The
ABL Facility includes a $100 million accordion feature which gives us the
ability to increase commitments from $675 million to $775 million. The ABL
Facility is collateralized by all assets of the company, including, but not
limited to, inventory, certain accounts receivable, pharmacy scripts, owned real
estate and certain Pathmark leaseholds. Borrowings under the ABL Facility bear
interest based on LIBOR or Prime interest rate pricing. At December 3, 2007,
there were $200.0 million of loans and $224.3 million in letters of credit
outstanding under this agreement. As of December 3, 2007, after reducing
availability for our borrowing base requirements, we had $250.7 million
available under the ABL Facility.
On December 27, 2007, in order to facilitate the syndication of the ABL Facility
under current market conditions, we entered into an Amended and Restated Credit
Agreement (the "Credit Agreement"). Part of the revolving commitments were
restructured as a $50 million term loan collateralized by certain real estate
assets and the applicable margin on credit extensions was increased.
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The Bridge Loan Facility, which was subsequently refinanced, provided for a term
loan of $370 million that initially matures on December 3, 2008, after which
time, subject to the satisfaction of certain conditions, the loans then
outstanding will either continue as term loans or be exchanged for exchange
notes, in each case having a maturity of December 3, 2015.
In connection with the new financing, we paid $10.7 million and $20.6 million in
financing fees for the ABL Facility and the Bridge Loan Facility, respectively.
We used our restricted cash on hand and borrowings under the ABL Facility and
the Bridge Loan Facility to fund the acquisition, terminate our existing
Revolver which had outstanding borrowings of $11.3 million, terminate Pathmark's
obligation under their revolver and term loan of $114.0 million and to fund
$375.5 million for the payment of Pathmark's Senior Subordinated Notes with a
face value of $350 million due 2012. At the close of business on December 3,
2007, we had $200.0 million in outstanding borrowings under the ABL Facility.
PUBLIC DEBT OBLIGATIONS
Outstanding notes totaling $212.8 million at December 1, 2007 consisted of $12.8
million of 9.125% Senior Notes due December 15, 2011 and $200.0 million of
9.375% Notes due August 1, 2039. Interest is payable quarterly on the 9.375%
Notes and semi-annually on the 9.125% Notes. The 9.375% Notes are now callable
at par ($25 per bond) and the 9.125% Notes are now callable at a premium to par
(104.563%). The 9.375% Notes are unsecured obligations and were issued under the
terms of our senior debt securities indenture, which contains among other
provisions, covenants restricting the incurrence of secured debt. The 9.375%
Notes are effectively subordinate to the Revolver and do not contain cross
default provisions. All covenants and restrictions for the 9.125% Senior Notes
have been eliminated in connection with the cash tender offer in fiscal 2005.
Our notes are not guaranteed by any of our subsidiaries.
During the first quarter of fiscal 2007, the outstanding principal amount of our
7.75% Notes of $31.9 million due April 15, 2007 matured and was paid in full.
To pay down our temporary financing as discussed above, on December 18, 2007, we
completed a public offering and issued $165 million 5.125% convertible senior
notes due 2011 and $255 million 6.75% convertible senior notes due 2012. The
2011 notes are not redeemable at our option at any time. The 2012 notes are
redeemable at our option on or after December 15, 2010, at a redemption price of
102.70% and on or after December 15, 2011, at a redemption price of 101.35%. The
initial conversion price of the 2011 notes is $36.40 representing a 30.0%
premium to the offering price of $28.00 and the initial conversion price of the
2012 notes is $37.80 representing a 35.0% premium to the offering price of
$28.00. The principal amount of these notes are convertible into shares of our
stock, cash, or a combination of stock and cash at our option. In connection
with this offering, we entered into convertible note hedge and warrant
transactions with financial institutions that are affiliates of the underwriters
of the notes to increase the effective conversion price of the notes. We also
entered into share lending agreements with affiliates of the underwriters to
lend such affiliates up to 11,278,988 shares of our common stock. Pursuant to
these agreements, we loaned 8,134,002 shares of our stock to these entities who
then sold 6,300,752 shares to the public in a public offering, which was
consummated on December 18, 2007. We did not receive any proceeds from the sale
of these shares other than a nominal lending fee.
OTHER
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We currently have an active shelf Registration Statement that was automatically
effective upon filing on December 7, 2007, allowing us to offer debt and/or
equity securities in amounts as we shall subsequently determine and at terms
contingent upon market conditions at the time of sale. We also currently have an
active shelf Registration Statement that was declared effective on June 21,
1999, allowing us to offer up to $75 million of debt and/or equity securities at
terms contingent upon market conditions at the time of sale.
We are the guarantor of a loan of $1.4 million related to a shopping center,
which will expire in 2011.
In the normal course of business, we have assigned to third parties various
leases related to former operating stores (the "Assigned Leases"). At the time
the leases were assigned, we generally remained secondarily liable with respect
to these lease obligations. As such, if any of the assignees were unable to
continue making payments under the Assigned Leases, we could be required to
assume the lease obligation. As of December 1, 2007, 135 Assigned Leases remain
in place. Assuming that each respective assignee was unable to make payments
under an Assigned Lease, an event we believe to be remote, we estimate our
maximum potential obligation with respect to the Assigned Leases to be
approximately $508.6 million, which could be partially or totally offset by
reassigning or subletting these leases.
Our existing senior debt rating was Caa1 with negative outlook with Moody's
Investors Service ("Moody's") and B- with positive outlook with Standard &
Poor's Ratings Group ("S&P") as of December 1, 2007. On December 10, 2007,
subsequent to our quarter end, S&P changed our rating to B and removed all of
the ratings from CreditWatch. At the same time S&P assigned B- ratings to our
$370 million senior secured bridge credit facility, our $165 million 5.125%
convertible senior notes due 2011 and our $255 million 6.75% convertible senior
notes due 2012. On December 11, 2007, subsequent to our quarter end, Moody's
assigned a B2 rating to our senior secured bridge credit facility and a Caa1
rating to our $165 million 5.125% convertible senior notes due 2011 and our $255
million 6.75% convertible senior notes due 2012.
Our liquidity rating was SGL3 with Moody's as of December 1, 2007. Our recovery
rating was 1 with S&P as of December 1, 2007 indicating a high expectation of
100% recovery of our senior debt to our lenders. Future rating changes could
affect the availability and cost of financing to our Company.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those accounting estimates that we believe are
important to the portrayal of our financial condition and results of operations
and require our most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Self-Insurance Reserves
Our Consolidated Balance Sheets include liabilities for self-insured workers'
compensation and general liability claims. We estimate the required liability of
these claims on a discounted basis, utilizing an actuarial method, which is
based upon various assumptions, which include, but are not limited to, our
historical loss experience, projected loss development factors, actual payroll,
legal costs and other data.
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Legal expenses incurred in connection with workers' compensation and general
liability claims are charged to the specific claim to which costs pertain. The
required liability is also subject to adjustment in the future based upon the
changes in claims experience, including changes in the number of incidents
(frequency) and changes in the ultimate cost per incident (severity).
Long-Lived Assets
We review the carrying values of our long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. This review is based upon groups of assets and
the undiscounted estimated future cash flows from these assets to determine if
the carrying value of these assets is recoverable from their respective cash
flows. If this review indicates an impairment exists, we measure this impairment
on a discounted basis using a probability weighted approach and a 7 year U.S.
Treasury risk free rate.
We also review assets in stores planned for closure or conversion for impairment
upon determination that these assets will not be used for their intended useful
life. During the 12 and 40 weeks ended December 1, 2007, we recorded impairment
losses on long-lived assets due to the closure or conversion in the normal
course of business of $2.5 million and $3.6 million, respectively.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense. If current operating levels do not continue to improve,
there may be future impairments on long-lived assets, including the potential
for impairment of assets that are held and used.
Closed Store and Closed Warehouse Reserves
For closed stores and warehouses that are under long-term leases, we record a
discounted liability using a risk free rate for the future minimum lease
payments and related costs, such as utilities and taxes, from the date of
closure to the end of the remaining lease term, net of estimated probable
recoveries from projected sublease rentals. If estimated cost recoveries exceed
our liability for future minimum lease payments, the excess is recognized as
income over the term of the sublease. We estimate future net cash flows based on
our experience in and our knowledge of the market in which the closed store and
warehouse is located. However, these estimates project net cash flow several
years into the future and are affected by variable factors such as inflation,
real estate markets and economic conditions. Variation in these factors could
cause changes to our estimates. As of December 1, 2007, we had recorded
liabilities for estimated probable obligations of $198 million. Of this amount,
$12 million relates to stores closed in the normal course of business, $30
million relates to stores and warehouses closed as part of the asset disposition
initiatives (see Note 8 of our Consolidated Financial Statements), and $156
million relates to stores closed as part of our discontinued operations (see
Note 7 of our Consolidated Financial Statements).
Employee Benefit Plans
The determination of our obligation and expense for pension and other
postretirement benefits is dependent, in part, on our selection of certain
assumptions used by our actuaries in calculating these amounts. These
assumptions include, among other things, the discount rate, the expected
long-term rate of return on plan assets and the rates of increase in
compensation and health care costs. In accordance with U.S. GAAP, actual results
that differ from our Company's assumptions are accumulated and amortized over
future periods and, therefore, affect our recognized expense and recorded
obligation in such future periods. While we believe that our assumptions are
appropriate, significant differences in our actual experience or significant
changes in our assumptions may materially affect our pension and other
post-retirement obligations and our future expense.
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Inventories
We evaluate inventory shrinkage throughout the year based on actual physical
counts and record reserves based on the results of these counts to provide for
estimated shrinkage between the store's last inventory and the balance sheet
date.
Income Taxes
As discussed in Note 11 of the Consolidated Financial Statements, our Company
recorded a valuation allowance for the entire net deferred tax asset since, in
accordance with SFAS 109, it was more likely than not that the net deferred tax
asset would not be utilized based on historical cumulative losses. Under SFAS
109, this valuation allowance could be reversed in future periods if we
experience improvement in our operations.
We adopted the provisions of Financial Accounting Standards Board ("FASB")
Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an
Interpretation of FASB Statement 109 ("FIN 48") as of February 25, 2007. The
cumulative effect of the adoption of the recognition and measurement provisions
of FIN 48 resulted in a $24.4 million increase to the February 25, 2007 balance
of retained earnings. Results of prior periods have not been restated. Our
policy for interest and penalties under FIN 48 related to income tax exposures
was not impacted as a result of the adoption of the recognition and measurement
provisions of FIN 48. Therefore, we continue to recognize interest and penalties
as incurred within "Benefit from (provision for) income taxes" in our
Consolidated Statements of Operations. Refer to Note 11 - Income Taxes for
further discussion.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an
Interpretation of FASB Statement 109 ("FIN 48"), which clarifies the accounting
for uncertainty in tax positions. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 requires
that we determine whether the benefits of our tax positions are more likely than
not of being sustained upon audit based on the technical merits of the tax
position. For tax positions that are more likely than not of being sustained
upon audit, we recognize the largest amount of the benefit that is more likely
than not of being sustained in our Consolidated Financial Statements. For tax
positions that are not more likely than not of being sustained upon audit, we do
not recognize any portion of the benefit in our Consolidated Financial
Statements. The provisions of FIN 48 also provide guidance on derecognition,
classification, interest and penalties, accounting in interim periods, and
disclosure. We adopted these requirements as of February 25, 2007.
The cumulative effect of the adoption of the recognition and measurement
provisions of FIN 48 resulted in a $24.4 million increase to the February 25,
2007 balance of retained earnings. Results of prior periods have not been
restated. Our policy for interest and penalties under FIN 48 related to income
tax exposures was not impacted as a result of the adoption of the recognition
and measurement provisions of FIN 48. Therefore, we continue to recognize
interest and penalties as incurred within "(Provision for) benefit from income
taxes" in our Consolidated Statements of Operations. Refer to Note 11 - Income
Taxes for further discussion.
In October 2004, the government passed the Homeland Investment Act which allows
companies to repatriate cash balances from their controlled foreign subsidiaries
at a reduced rate. This was achieved by permitting a one time 85% dividends
received deduction. Our Company completed the sale of our
74
Canadian subsidiary to Metro, Inc. during fiscal 2005. As a result of this
transaction, our Company repatriated $949.0 million from our foreign
subsidiaries, of which $500.0 million is intended to qualify for the 85%
dividends received deduction. Until such time as the taxing authorities have
affirmed the adequacy of our Company's Domestic Reinvestment Plan, the balance
sheet is and will be grossed-up to reflect liabilities for uncertain tax
positions and deferred tax assets for net operating losses in accordance with
FIN 48.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting principles, and
expands disclosures about fair value measurements. The provisions of SFAS 157
are effective for fiscal years beginning after November 15, 2007 (our year
ending February 28, 2009). Our Company is currently evaluating the impact, if
any, of the provisions of SFAS 157.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 was issued to
improve the overall financial statement presentation of pension and other
postretirement plans and does not impact the determination of net periodic
benefit cost or the measurement of plan assets or obligations. This standard
requires companies to recognize the funded status of their defined benefit
pension and other postretirement benefit plans as a net liability or asset on
their balance sheets and requires any unrecognized prior service costs and
actuarial gains or losses to be recognized as a component of accumulated other
comprehensive income or loss. We adopted these requirements as of February 24,
2007. Additionally, SFAS 158 no longer allows companies to measure their plans
as of any date other than the end of their fiscal year; however, this provision
is not effective for companies until fiscal years ending after December 15, 2008
(our year ending February 28, 2009). We have chosen to early adopt this
requirement in fiscal 2007. We used the second approach as described in
paragraph 19 of SFAS 158 to transition our measurement date from December 31,
2006 to February 24, 2007. Under this approach, we have recorded an adjustment
to opening retained earnings in the amount of $0.6 million to decrease the
February 25, 2007 balance of retained earnings. Refer to Note 9 - Retirement
Plans and Benefits for further discussion.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. The provisions of
SFAS 159 are effective for fiscal years beginning after November 15, 2007 (our
year ending February 28, 2009). Our Company is currently evaluating the impact,
if any, of the provisions of SFAS 159.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
141R"). SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, the goodwill acquired, and any noncontrolling
interest in the acquiree. This statement also establishes disclosure
requirements to enable the evaluation of the nature and financial effect of the
business combination. SFAS 141(R) is effective for fiscal years beginning after
December 15, 2008 (our year ended February 27, 2010). Our Company is currently
evaluating the impact, if any of the provisions of SFAS 141R.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements--an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 amends ARB 51 to establish
75
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008 (our year ended February 27, 2010). We have evaluated
the provisions of SFAS 160 and the guidance will not have an impact on our
Company's financial condition or results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk represents the risk of loss from adverse market changes that may
impact our consolidated financial position, results of operations or cash flows.
Among other possible market risks, we are exposed to such risk in the areas of
interest rates and foreign currency exchange rates.
From time to time, we may enter hedging agreements in order to manage risks
incurred in the normal course of business including forward exchange contracts
to manage our exposure to fluctuations in foreign exchange rates.
INTEREST RATES
Our exposure to market risk for changes in interest rates relates primarily to
our debt obligations. We do not have cash flow exposure due to rate changes on
$214.2 million of our total indebtedness as of December 1, 2007 because they are
at fixed interest rates. However, we do have cash flow exposure on our committed
bank lines of credit due to our variable floating rate pricing. Accordingly,
during the 12 and 40 weeks ended December 1, 2007, a presumed 1% change in the
variable floating rate would have impacted interest expense by $0.06 million and
$0.15 million, respectively. During the 12 and 40 weeks ended December 2, 2006,
a presumed 1% change in the variable floating rate would have impacted interest
expense by $0.3 million and $0.6 million, respectively.
FOREIGN EXCHANGE RISK
We are exposed to foreign exchange risk to the extent of adverse fluctuations in
the Canadian dollar. A change in the Canadian currency of 10% would have
resulted in a fluctuation in our investment in Metro, Inc. of nil and $30.2
million at December 1, 2007 and February 24, 2007, respectively.
On November 6, 2007, we entered into a currency exchange forward contract to
purchase $380 million United States dollars to hedge the value of our shares in
Metro, Inc. against adverse movements in exchange rates. Our Company measures
ineffectiveness based upon the change in forward exchange rates. In the third
quarter of fiscal 2007 and upon completion of the sale of our shares of Metro,
Inc., this forward contract was settled.
We do not believe that a change in the Canadian currency of 10% will have a
material effect on our Consolidated Statements of Operations or Cash Flows.
ITEM 4 - CONTROLS AND PROCEDURES
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We have established and maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to our Company's management, including our
President and Chief Executive Officer and Senior Vice President, Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
We carried out an evaluation, under the supervision and with the participation
of our Company's management, including our Company's President and Chief
Executive Officer along with our Company's Senior Vice President, Chief
Financial Officer, of the effectiveness of the design and operation of our
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(b). Based upon the foregoing, our Company's President and Chief Executive
Officer along with our Company's Senior Vice President, Chief Financial Officer,
concluded that our Company's disclosure controls and procedures were effective
as of the period covered by this report.
There have been no changes during our Company's fiscal quarter ended December 1,
2007 in our Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our Company's
internal control over financial reporting.
CAUTIONARY NOTE
This presentation may contain forward-looking statements about the future
performance of our Company, and is based on our assumptions and beliefs in light
of information currently available. We assume no obligation to update this
information. 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 our principal markets; our
relationships with our employees; the terms of future collective bargaining
agreements; the costs and other effects of lawsuits and administrative
proceedings; the nature and extent of continued consolidation in the food
industry; changes in the financial markets which may affect our cost of capital
or the ability to access capital; supply or quality control problems with our
vendors; and changes in economic conditions, which may affect the buying
patterns of our customers.
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PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
LaMarca et al v. The Great Atlantic & Pacific Tea Company, Inc. ("Defendants")
On June 24, 2004, a class action complaint was filed in the Supreme Court of the
State of New York against The Great Atlantic & Pacific Tea Company, Inc., d/b/a
A&P, The Food Emporium, and Waldbaum's alleging violations of the overtime
provisions of the New York Labor Law. Three named plaintiffs, Benedetto Lamarca,
Dolores Guiddy, and Stephen Tedesco, alleged on behalf of a class that our
Company failed to pay overtime wages to full-time hourly employees who were
either required or permitted to work more than 40 hours per week.
In April 2006, the plaintiffs filed a motion for class certification. In July
2007, the Court granted the plaintiffs' motion and certified the class as
follows: All full-time hourly employees of Defendants who were employed in
Defendants' supermarket stores located in the State of New York, for any of the
period from June 24, 1998 through the date of the commencement of the action,
whom Defendants required or permitted to perform work in excess of 40 hours per
week without being paid overtime wages. The Court also ruled that the issue of
whether to include an "opt-in" or "opt-out" provision is premature and can be
decided after discovery has been had.
As class certification was granted only recently, and as discovery on the
prospective plaintiffs comprising the class has yet to be conducted, neither the
number of class participants nor the sufficiency of their respective claims can
be determined at this time.
ITEM 1A - RISK FACTORS
Set forth below is a summary of the material risks to an investment in our
securities.
- Our retail food business and the grocery retailing industry continues to
experience fierce competition from mass merchandisers, warehouse clubs,
drug stores, convenience stores, discount merchandisers, dollar stores,
restaurants, other retail chains, nontraditional competitors and emerging
alternative formats in the markets where we have retail operations.
Competition with these outlets is based on price, store location,
advertising and promotion, product mix, quality and service. Some of these
competitors may have greater financial resources, lower merchandise
acquisition costs and lower operating expenses than we do, and we may be
unable to compete successfully in the future. An overall lack of inflation
in food prices and increasingly competitive markets have made it difficult
generally for grocery store operators to achieve comparable store sales
gains. Because sales growth has been difficult to attain, our competitors
have attempted to maintain market share through increased levels of
promotional activities and discount pricing, creating a more difficult
environment in which to consistently increase year-over-year sales.
Price-based competition has also, from time to time, adversely affected
our operating margins. Our continued success is dependent upon our ability
to effectively compete in this industry and to reduce operating expenses,
including managing health care and pension costs contained in our
collective bargaining agreements. The competitive practices and pricing in
the food industry generally and particularly in our principal markets may
cause us to reduce our prices in order to gain or maintain our market
share of sales, thus reducing margins.
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- Our in-store pharmacy business is also subject to intense competition. In
particular, an adverse trend for drug retailing has been significant
growth in mail-order and internet-based prescription processors.
Pharmacies are exposed to risks inherent in the packaging and distribution
of pharmaceuticals and other healthcare products. In addition, the
conversion of various prescription drugs to over-the-counter medications,
the withdrawal of certain drugs from the market and changes in third party
reimbursement levels for prescription drugs, including changes in Medicare
Part D or state Medicaid programs, may have a material adverse effect on
our business. Failure to properly adhere to certain government
regulations, local registrations, applicable Medicare and Medicaid
regulations and prohibitions against paid referrals of patients could
result in the imposition of civil as well as criminal penalties.
- The retail food and food distribution industries, and the operation of our
businesses, specifically in the New York -- New Jersey and Philadelphia
regions, are sensitive to a number of economic conditions and other
factors such as (i.) food price deflation or inflation, (ii.) softness in
local and national economies, (iii.) increases in commodity prices, (iv.)
the availability of favorable credit and trade terms, (v.) changes in
business plans, operations, results and prospects, (vi.) potential delays
in the development, construction or start-up of planned projects, and
(vii.) other economic conditions that may affect consumer buying habits.
Any one or more of these economic conditions can affect our retail sales,
the demand for products we distribute to our retail customers, our
operating costs and other aspects of our business.
- Acts of war, threats of terror, acts of terror or other criminal activity
directed at the grocery or drug store industry, the transportation
industry, or computer or communications systems, could increase security
costs, adversely affect our operations, or impact consumer behavior and
spending as well as customer orders. Other events that give rise to actual
or potential food contamination, drug contamination, or food-borne illness
could have an adverse effect on our operating results.
- We could be adversely affected if consumers lose confidence in the safety
and quality of the food supply chain. Adverse publicity about these types
of concerns, whether or not valid, could discourage consumers from buying
products in our stores. The real or perceived sale of contaminated food
products by us could result in a loss of consumer confidence and product
liability claims, which could have a material adverse effect on our sales
and operations.
- Our operations subject us to various laws and regulations relating to the
protection of the environment, including those governing the management
and disposal of hazardous materials and the cleanup of contaminated sites.
Under some environmental laws, such as the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, also known as CERCLA or
the Superfund law, and similar state statues, responsibility for the
entire cost of cleanup of a contaminated site can be imposed upon any
current or former site owners or operators, or upon any party who sent
waste to the site, regardless of the lawfulness of the original activities
that led to the contamination. From time to time we have been named as one
of many potentially responsible parties at Superfund sites, although our
share of liability has typically been de minimis. Although we believe that
we are currently in substantial compliance with applicable environmental
requirements, future developments such as more aggressive enforcement
policies, new laws or discoveries of unknown conditions may require
expenditures that may have a material adverse effect on our business and
financial condition.
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- Our capital expenditures could differ from our estimate if development and
remodel costs vary from those budgeted, or if performance varies
significantly from expectations or if we are unsuccessful in acquiring
suitable sites for new stores.
- Our ability to achieve our profit goals will be affected by (i.) our
success in executing category management and purchasing programs that we
have underway, which are designed to improve our gross margins and reduce
product costs while making our product selection more attractive to
consumers, (ii.) our ability to achieve productivity improvements and
reduce shrink in our stores, (iii.) our success in generating efficiencies
in our supporting activities, and (iv.) our ability to eliminate or
maintain a minimum level of supply and/or quality control problems with
our vendors.
- The vast majority of our employees are members of labor unions. While we
believe that our relationships with union leaderships and our employees
are satisfactory, we operate under collective bargaining agreements which
periodically must be renegotiated. In the coming year, we have several
contracts expiring and under negotiation. In each of these negotiations,
rising health care and pension costs will be an important issue, as will
the nature and structure of work rules. We are hopeful, but cannot be
certain, that we can reach satisfactory agreements without work stoppages
in these markets. However, the actual terms of the renegotiated collective
bargaining agreements, our future relationships with our employees and/or
a prolonged work stoppage affecting a substantial number of stores could
have a material effect on our results.
- The amount of contributions made to our pension and multi-employer plans
will be affected by the performance of investments made by the plans and
the extent to which trustees of the plans reduce the costs of future
service benefits.
- Our Company is currently required to acquire a significant amount of our
saleable inventory from one supplier, C&S Wholesale Grocers, Inc. Although
there are a limited number of distributors that can supply our stores, we
believe that other suppliers could provide similar product on reasonable
terms. However, a change in suppliers could cause a delay in distribution
and a possible loss of sales, which would affect operating results
adversely.
- We have estimated our exposure to claims, administrative proceedings and
litigation and believe we have made adequate provisions for them, where
appropriate. Unexpected outcomes in both the costs and effects of these
matters could result in an adverse effect on our earnings.
- The integration of Pathmark's operations will require implementation of
appropriate operations, management and financial reporting systems and
controls. We may experience difficulties in effectively implementing these
and other systems and integrating Pathmark's systems and operations. The
integration of Pathmark will require the focused attention of A&P's
management team, including a significant commitment of their time and
resources. The need for both A&P's and Pathmark's management to focus on
integration matters could have a material and adverse impact on the
revenues and operating results of the combined company. The success of the
merger will depend, in part, on the combined company's ability to realize
the anticipated benefits from combining the businesses of A&P and
Pathmark, including, anticipated annual integration synergies within two
years, through cost reductions in overhead, greater efficiencies,
increased utilization of support facilities and the adoption of mutual
best practices between the two companies. It is possible that the
integration process could result in the loss of key employees, as well as
the disruption of each company's ongoing businesses or inconsistencies in
standards, controls, procedures and
80
policies, any or all of which could adversely affect our ability to
maintain relationships with customers and employees after the merger or to
achieve the anticipated benefits of the merger. These integration matters
could have a material adverse effect on our business.
- We have assumed all of Pathmark's liabilities, including contingent
liabilities, in connection with the merger. If there are unknown Pathmark
obligations, our business could be materially and adversely affected. We
may learn additional information about Pathmark's business that adversely
affects us, such as unknown liabilities, issues relating to internal
controls over financial reporting, issues that could affect our ability to
comply with the Sarbanes-Oxley Act or issues that could affect our ability
to comply with other applicable laws. As a result, we cannot assure you
that the acquisition of Pathmark will be successful or will not, in fact,
harm our business. Among other things, if Pathmark liabilities are greater
than expected, or if there are obligations of which we were not aware of
at the time of completion of the acquisition, our business could be
materially and adversely affected.
- Following the closing of the acquisition of Pathmark, Tengelmann, A&P's
former majority shareholder, owned beneficially and of record a
substantial percentage of our common stock on a fully diluted basis. As a
result of this equity ownership and our stockholder agreement with
Tengelmann, Tengelmann has the power to significantly influence the
results of shareholder votes and the election of our board of directors,
as well as transactions involving a potential change of control of our
Company. Tengelmann may support strategies and directions for our Company
which are in its best interests but which are opposed to shareholder
interests.
- Our substantial indebtedness could impair our financial condition and our
ability to fulfill our debt obligations, including our obligations under
the notes. Our indebtedness could make it more difficult for us to satisfy
our obligations with respect to the notes and our other indebtedness,
which could in turn result in an event of default on the notes or such
other indebtedness, require us to dedicate a substantial portion of our
cash flow from operations to debt service payments, thereby reducing the
availability of cash for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes, impair our
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes, diminish our ability to withstand a downturn in our business,
the industry in which we operate or the economy generally, limit our
flexibility in planning for, or reacting to, changes in our business and
the industry in which we operate, and place us at a competitive
disadvantage compared to certain competitors that have proportionately
less debt. Our ABL facility contains restrictive covenants customary for
facilities of that type which limit our ability to incur additional debt,
pay dividends, grant additional liens, make investments and take other
actions. These restrictions may limit flexibility to undertake future
financings and take other actions. If we are unable to meet our debt
service obligations, we could be forced to restructure or refinance our
indebtedness, seek additional equity capital or sell assets. We may be
unable to obtain financing or sell assets on satisfactory terms, or at
all. In addition, our ABL facility bears interest at a variable rate. If
market interest rates increase, such variable-rate debt will have higher
debt service requirements, which could adversely affect our cash flow.
While we may enter into agreements limiting our exposure to higher
interest rates, any such agreements may not offer complete protection from
this risk.
- Fluctuating fuel costs may adversely affect our operating costs since we
incur the cost of fuel in connection with the transportation of goods from
our warehouse and distribution facilities to our stores. In addition,
operations at our stores are sensitive to rising utility fuel costs due to
the amount
81
of electricity and gas required to operate our stores. We may not be able
to recover these rising utility and fuel costs through increased prices
charged to our customers. Our profitability is particularly sensitive to
the cost of oil. Oil prices directly affect our product transportation
costs and fuel costs due to the amount of electricity and gas required to
operate our stores as well as our utility and petroleum-based supply
costs; including plastic bags for example.
- We are subject to federal, state and local laws and regulations relating
to zoning, land use, environmental protection, work place safety, public
health, community right-to-know, beer and wine sales, pharmaceutical sales
and gasoline station operations. A number of states and local
jurisdictions regulate the licensing of supermarkets, including beer and
wine license grants. In addition, under certain local regulations, we are
prohibited from selling beer and wine in certain of our stores. Employers
are also subject to laws governing their relationship with employees,
including minimum wage requirements, overtime, working conditions,
disabled access and work permit requirements. Compliance with these laws
could reduce the revenue and profitability of our supermarkets and could
otherwise adversely affect our business, financial condition or results of
operations. In addition, any changes in these law or regulations could
significantly increase our compliance costs and adversely affect our
results of operations, financial condition and liquidity.
- We have large, complex information technology systems that are important
to business operations. We could encounter difficulties developing new
systems and encounter difficulties maintaining, upgrading or securing our
existing systems. Such difficulties could lead to significant expenses or
losses due to disruption in our business operations.
- Our articles of incorporation permit our board of directors to issue
preferred shares without first obtaining shareholder approval. If we
issued preferred shares, these additional securities may have dividend or
liquidation preferences senior to our common stock. If we issue
convertible preferred shares, a subsequent conversion may dilute the
current common shareholders' interest. Issuance of such preferred stock
could adversely affect the price of our common stock.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward-looking statements made
by us or our representatives.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our special meeting of shareholders, held November 8, 2007, there were
31,639,999 shares or 75.40% of the 41,960,817 shares outstanding and entitled to
vote represented either in person or by proxy.
82
Of the total shares cast, 75.36% voted to approve the issuance of shares of A&P
common stock in connection with the merger of A&P's wholly owned subsidiary,
Sand Merger Corp., and Pathmark. Upon consummation of the merger, Pathmark's
shareholders were entitled to receive $9.00 in cash and 0.12963 shares of A&P
common stock for each share of Pathmark stock they owned.
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION
---------- -----------
2.1 Stock Purchase Agreement, dated as of July 19, 2005, by and among
the Company, A&P Luxembourg S.a.r.l., Metro Inc. and 4296711 Canada
Inc. (incorporated herein by reference to Exhibit 2.1 to Form 8-K
filed on July 22, 2005)
3.1 Articles of Incorporation of The Great Atlantic & Pacific Tea
Company, Inc., as amended through July 1987 (incorporated herein by
reference to Exhibit 3(a) to Form 10-K filed on May 27, 1988)
3.2 By-Laws of The Great Atlantic & Pacific Tea Company, Inc., as
amended and restated through October 6, 2005 (incorporated herein by
reference to Exhibit 3.1 to Form 8-K filed on October 11, 2005)
4.1 Indenture, dated as of January 1, 1991 between the Company and
JPMorgan Chase Bank (formerly The Chase Manhattan Bank as successor
by merger to Manufacturers Hanover Trust Company), as trustee (the
"Indenture") (incorporated herein by reference to Exhibit 4.1 to
Form 8-K)
83
4.2 First Supplemental Indenture, dated as of December 4, 2001, to the
Indenture, dated as of January 1, 1991 between our Company and
JPMorgan Chase Bank, relating to the 7.70% Senior Notes due 2004
(incorporated herein by reference to Exhibit 4.1 to Form 8-K filed
on December 4, 2001)
4.3 Second Supplemental Indenture, dated as of December 20, 2001, to the
Indenture between our Company and JPMorgan Chase Bank, relating to
the 9 1/8% Senior Notes due 2011 (incorporated herein by reference
to Exhibit 4.1 to Form 8-K filed on December 20, 2001)
4.4 Successor Bond Trustee (incorporated herein by reference to Exhibit
4.4 to Form 10-K filed on May 9, 2003)
4.5 Third Supplemental Indenture, dated as of August 23, 2005, to the
Indenture between the Company and Wilmington Trust Company (as
successor to JPMorgan Chase Bank) (incorporated herein by reference
to Exhibit 4.1 to Form 8-K filed on August 23, 2005)
4.6 Fourth Supplemental Indenture, dated as of August 23, 2005, to the
Indenture between the Company and Wilmington Trust Company (as
successor to JPMorgan Chase Bank) (incorporated herein by reference
to Exhibit 4.2 to Form 8-K filed on August 23, 2005)
4.7 Indenture, dated as of December 18, 2007, among The Great Atlantic &
Pacific Tea Company, Inc. and Wilmington Trust Company, as Trustee
(incorporated herein by reference to Exhibit 4.1 to Form 8-K filed
on December 17, 2007)
4.8 First Supplemental Indenture, dated as of December 18, 2007, among
The Great Atlantic & Pacific Tea Company, Inc. and Wilmington Trust
Company, as Trustee, relating to the 5.125% Senior Convertible Notes
due 2011 (incorporated herein by reference to Exhibit 4.2 to Form
8-K filed on December 17, 2007)
4.9 Second Supplemental Indenture, dated as of December 18, 2007, among
The Great Atlantic & Pacific Tea Company, Inc. and Wilmington Trust
Company, as Trustee, relating to the 6.75% Senior Convertible Notes
due 2011 (incorporated herein by reference to Exhibit 4.4 to Form
8-K filed on December 17, 2007)
4.10 Form of Global 5.125% Senior Convertible Note due 2011 (incorporated
herein by reference to Exhibit 4.3 to Form 8-K filed on December 17,
2007)
4.11 Form of Global 6.75% Senior Convertible Note due 2012 (incorporated
herein by reference to Exhibit 4.5 to Form 8-K filed on December 17,
2007)
4.12 Credit Agreement dated as of November 15, 2005 between the Company
and Bank of America, N.A. as Administrative Agent and Collateral
Agent, JPMorgan Chase Bank, N.A. as Syndication Agent, Wachovia
Bank, National Association as Documentation Agent and Banc of
America Securities LLC as Lead Arranger
84
("Credit Agreement") (incorporated herein by reference to Exhibit
4.1 to Form 8-K filed on November 18, 2005 and Item 8.01 to Form 8-K
filed April 10, 2006)
4.13 First amendment to Credit Agreement dated March 13, 2006
(incorporated herein by reference to Exhibit 4.8 to Form 10-K filed
on April 25, 2007)
4.14 Second amendment to Credit Agreement dated November 10, 2006
(incorporated herein by reference to Exhibit 4.9 to Form 10-K filed
on April 25, 2007)
4.15 Third amendment to Credit Agreement dated March 9, 2007(incorporated
herein by reference to Exhibit 4.10 to Form 10-Q filed on October
17, 2007)
10.1 Executive Employment Agreement, made and entered into as of the 15th
day of August, 2005, by and between the Company and Mr. Eric Claus
(incorporated herein by reference to Exhibit 10.1 to Form 8-K filed
on September 9, 2005) and a technical amendment (incorporated herein
by reference to Exhibit 10.1 to Form 10-K filed on May 9, 2006)
10.2 Employment Agreement, made and entered into as of the 1st day of
November, 2000, by and between the Company and William P. Costantini
("Costantini Agreement") (incorporated herein by reference to
Exhibit 10 to Form 10-Q filed on January 16, 2001)
10.3 Amendment to Costantini Agreement dated April 30, 2002 (incorporated
herein by reference to Exhibit 10.7 to Form 10-K filed on July 5,
2002)
10.4 Confidential Separation and Release Agreement by and between William
P. Costantini and The Great Atlantic & Pacific Tea Company, Inc.
dated November 4, 2004 (incorporated herein by reference to Exhibit
10.4 to Form 10-Q filed on January 7, 2005)
10.5 Employment Agreement, made and entered into as of the 16th day of
June, 2003, by and between our Company and Brenda Galgano
(incorporated herein by reference to Exhibit 10.9 to Form 10-Q filed
on October 17, 2003)
10.6 Employment Agreement, made and entered into as of the 24th day of
February, 2002, by and between our Company and Mitchell P. Goldstein
(incorporated herein by reference to Exhibit 10.8 to Form 10-K filed
on July 5, 2002)
85
10.7 Letter Agreement dated September 6, 2005, between Mitchell P.
Goldstein and our Company (incorporated herein by reference to
Exhibit 10.2 to Form 8-K filed on September 9, 2005)
10.8 Employment Agreement, made and entered into as of the 2nd day of
October, 2002, by and between our Company and Peter Jueptner
("Jueptner Agreement") (incorporated herein by reference to Exhibit
10.26 to Form 10-Q filed on October 22, 2002)
10.9 Amendment to Jueptner Agreement dated November 10, 2004
(incorporated herein by reference to Exhibit 10.8 to Form 10-K filed
on May 10, 2005)
10.10 Offer Letter dated the 18th day of September 2002, by and between
our Company and Peter Jueptner (incorporated herein by reference to
Exhibit 10.10 to Form 10-Q filed on January 10, 2003)
10.11 Employment Agreement, made and entered into as of the 14th day of
May, 2001, by and between our Company and John E. Metzger, as
amended February 14, 2002 ("Metzger Agreement") (incorporated herein
by reference to Exhibit 10.13 to Form 10-K filed on July 5, 2002)
10.12 Amendment to John E. Metzger Agreement dated October 25, 2004
(incorporated herein by reference to Exhibit 10.12 to Form 10-K
filed on May 10, 2005)
10.13 Employment Agreement, made and entered into as of the 25th day of
January, 2006, by and between our Company and Jennifer MacLeod
(incorporated herein by reference to Exhibit 10.13 to Form 10-K
filed on May 9, 2006)
10.14 Employment Agreement, made and entered into as of the 1st day of
March 2005, by and between our Company and William J. Moss
(incorporated herein by reference to Exhibit 10.13 to Form 10-K
filed on May 10, 2005)
10.15 Employment Agreement, made and entered into as of the 11th day of
December, 2006, by and between our Company and Rebecca Philbert, and
Offer Letter dated the 11th day of December, 2006 (incorporated
herein by reference to Exhibit 10.15 to Form 10-K filed on April 25,
2007)
10.16 Employment Agreement, made and entered into as of the 28th day of
October, 2002, by and between our Company and Brian Piwek, and Offer
Letter dated the 23rd day of October, 2002 ("Piwek Agreement")
(incorporated herein by reference to Exhibit 10.14 to Form 10-Q
filed on January 10, 2003)
10.17 Amendment to Brian Piwek Agreement dated February 4, 2005
(incorporated herein by reference to Exhibit 10.15 to Form 10-K
filed on May 10, 2005)
10.18 Employment Agreement, made and entered into as of the 4th day of
January 2006, by and between our Company and Melissa E. Sungela
(incorporated herein by reference to Exhibit 10.17 to Form 10-Q
filed on January 6, 2006)
86
10.19 Employment Agreement, made and entered into as of the 12th day of
September 2005, by and between our Company and Paul Wiseman
(incorporated herein by reference to Exhibit 10.17 to Form 10-Q
filed on October 18, 2005)
10.20 Employment Agreement, made and entered into as of the 2nd day of
December 2004, by and between our Company and Allan Richards
(incorporated herein by reference to Exhibit 10.18 to Form 10-Q
filed on October 18, 2005)
10.21 Employment Agreement, made and entered into as of the 2nd day of
December 2004, by and between our Company and Stephen Slade
(incorporated herein by reference to Exhibit 10.19 to Form 10-Q
filed on October 18, 2005)
10.22 Supplemental Executive Retirement Plan effective as of September 1,
1997 (incorporated herein by reference to Exhibit 10.B to Form 10-K
filed on May 27, 1998)
10.23 Supplemental Retirement and Benefit Restoration Plan effective as of
January 1, 2001 (incorporated herein by reference to Exhibit 10(j)
to Form 10-K filed on May 23, 2001)
10.24 1994 Stock Option Plan (incorporated herein by reference to Exhibit
10(e) to Form 10-K filed on May 24, 1995)
10.25 1998 Long Term Incentive and Share Award Plan (incorporated herein
by reference to Exhibit 10(k) to Form 10-K filed on May 19, 1999, to
Appendix B to the Proxy Statement dated May 27, 2005 and to Appendix
B to the Proxy Statement dated May 25, 2006)
10.26 Form of Stock Option Grant (incorporated herein by reference to
Exhibit 10.20 to Form 10-K filed on May 10, 2005)
10.27 Description of 2005 Turnaround Incentive Compensation Program
(incorporated herein by reference to Exhibit 10.21 to Form 10-K
filed on May 10, 2005)
10.28 Form of Restricted Share Unit Award Agreement (incorporated herein
by reference to Exhibit 10.22 to Form 10-K filed on May 10, 2005)
10.29 Description of 2006 Long Term Incentive Plan (incorporated herein by
reference to Exhibit 10.28 to Form 10-Q filed on July 21, 2006)
10.30 Form of 2006 Restricted Share Unit Award Agreement (incorporated
herein by reference to Exhibit 10.29 to Form 10-Q filed on July 21,
2006)
10.31 1994 Stock Option Plan for Non-Employee Directors (incorporated
herein by reference to Exhibit 10(f) to Form 10-K filed on May 24,
1995)
87
10.32 2004 Non-Employee Director Compensation effective as of July 14,
2004 (incorporated herein by reference to Exhibit 10.15 to Form 10-Q
filed on July 29, 2004 and to Appendix C to the Proxy Statement
dated May 25, 2006)
10.33 Description of Management Incentive Plan (incorporated herein by
reference to Exhibit 10.30 to Form 10-K filed on May 9, 2006)
10.34 Asset Purchase Agreement, dated as of June 27, 2005, by and between
the Company, Ocean Logistics LLC and C&S Wholesale Grocers, Inc.
(incorporated herein by reference to Exhibit 10.38 to Form 10-Q/A
filed on June 25, 2007)
10.35 Supply Agreement, dated as of June 27, 2005, by and between the
Company and C&S Wholesale Grocers, Inc. (incorporated herein by
reference to Exhibit 10.39 to Form 10-Q/A filed on June 25, 2007)
10.36 Information Technology Transition Services Agreement by and between
The Great Atlantic and Pacific Tea Company, Limited ("A&P Canada")
and Metro, Inc. entered into on August 15, 2005 (incorporated herein
by reference to Exhibit 10.40 to Form 10-Q filed on October 18,
2005)
10.37 Investor Agreement by and between A&P Luxembourg S.a.r.l., a wholly
owned subsidiary of the Company, and Metro, Inc. entered into on
August 15, 2005 (incorporated herein by reference to Exhibit 10.41
to Form 10-Q filed on October 18, 2005)
10.38 Letter of Credit Agreement, dated as of October 14, 2005 between the
Company and Bank of America, N.A., as Issuing Bank, ("Letter of
Credit Agreement") (incorporated herein by reference to Exhibit
10.42 to Form 10-Q filed on October 18, 2005)
10.39 First amendment to Letter of Credit Agreement, dated October 13,
2006 (incorporated herein by reference to Exhibit 10.39 to Form 10-K
filed on April 25, 2007)
10.40 Second amendment to Letter of Credit Agreement, dated November 10,
2006 (incorporated herein by reference to Exhibit 10.40 to Form 10-K
filed on April 25, 2007)
10.41 Third amendment to Letter of Credit Agreement, dated October 14,
2007, (incorporated herein by reference to Exhibit 10.41 to Form
10-Q filed on October 17, 2007)
10.42 Entry into a Material Definitive Agreement dated as of March 4,
2007, by and between the Company and Pathmark Stores, Inc.
(incorporated herein by reference to Form 8-K and the accompanying
exhibits filed on March 6, 2007)
88
10.43 Employment Agreement, made and entered into as of the 1st day of May
2007, by and between our Company and Andreas Guldin (incorporated
herein by reference to Exhibit 10.1 to Form 8-K filed on May 7,
2007)
10.44 Credit Agreement dated as of December 3, 2007 among The Great
Atlantic & Pacific Tea Company, Inc., and the other Borrowers party
thereto, as Borrowers and the Lenders party thereto, and Bank of
America, N.A., as Administrative Agent and Collateral Agent and Banc
of America Securities LLC as Lead Arranger (incorporated herein by
reference to Exhibit 10.1 to Form 8-K/A Amendment No. 2 filed on
December 3, 2007)
10.45* Amended and Restated Credit Agreement dated as of December 27, 2007
among The Great Atlantic & Pacific Tea Company, Inc., and the other
Borrowers party thereto, as Borrowers and the Lenders party thereto,
and Bank of America, N.A., as Administrative Agent and Collateral
Agent and Banc of America Securities LLC as Lead Arranger, as filed
herein
10.46 Senior Secured Bridge Credit Agreement dated as of December 3, 2007
among The Great Atlantic & Pacific Tea Company, Inc., The Lenders
from time to time party thereto, Bank of America, N.A., as
Administrative Agent, and Lehman Commercial Paper Inc., as
Syndication Agent. (incorporated herein by reference to Exhibit 10.2
to Form 8-K/A Amendment No. 2 filed on December 3, 2007)
10.47 Confirmation of Issuer Warrant Transaction for 2011 Notes, dated
December 12, 2007, by and between The Great Atlantic & Pacific Tea
Company, Inc. and Bank of America, N.A. (incorporated herein by
reference to Exhibit 10.1 to Form 8-K filed on December 12, 2007)
10.48 Amendment to Confirmation of Issuer Warrant Transaction (2011),
dated as of December 17, 2007, by and between The Great Atlantic &
Pacific Tea Company, Inc. and Bank of America, N.A. (incorporated
herein by reference to Exhibit 10.3 to Form 8-K filed on December
17, 2007)
10.49 Confirmation of Issuer Warrant Transaction for 2012 Notes, dated
December 12, 2007, by and between The Great Atlantic & Pacific Tea
Company, Inc. and Bank of America, N.A. (incorporated herein by
reference to Exhibit 10.2 to Form 8-K filed on December 12, 2007)
10.50 Amendment to Confirmation of Issuer Warrant Transaction (2012),
dated as of December 17, 2007, by and between The Great Atlantic &
Pacific Tea Company, Inc. and Bank of America, N.A. (incorporated
herein by reference to Exhibit 10.4 to Form 8-K filed on December
17, 2007)
10.51 Confirmation of Issuer Warrant Transaction for 2011 Notes, dated
December 12, 2007, by and between The Great Atlantic & Pacific Tea
Company, Inc. and Lehman Brothers OTC Derivatives Inc. (incorporated
herein by reference to Exhibit 10.3 to Form 8-K filed on December
12, 2007)
10.52 Amendment to Confirmation of Issuer Warrant Transaction (2011),
dated as of December 17, 2007, by and between The Great Atlantic &
Pacific Tea Company, Inc. and Lehman Brothers OTC Derivatives Inc.
(incorporated herein by reference to Exhibit 10.5 to Form 8-K filed
on December 17, 2007)
89
10.53 Confirmation of Issuer Warrant Transaction for 2012 Notes, dated
December 12, 2007, by and between The Great Atlantic & Pacific Tea
Company, Inc. and Lehman Brothers OTC Derivatives Inc. (incorporated
herein by reference to Exhibit 10.4 to Form 8-K filed on December
12, 2007)
10.54 Amendment to Confirmation of Issuer Warrant Transaction (2012),
dated as of December 17, 2007, by and between The Great Atlantic &
Pacific Tea Company, Inc. and Lehman Brothers OTC Derivatives Inc.
(incorporated herein by reference to Exhibit 10.6 to Form 8-K filed
on December 17, 2007)
10.55 Confirmation of Convertible Bond Hedge Transaction for 2011 Notes,
dated December 12, 2007, by and between The Great Atlantic & Pacific
Tea Company, Inc. and Bank of America, N.A. (incorporated herein by
reference to Exhibit 10.5 to Form 8-K filed on December 12, 2007)
10.56 Confirmation of Convertible Bond Hedge Transaction for 2012 Notes,
dated December 12, 2007, by and between The Great Atlantic & Pacific
Tea Company, Inc. and Bank of America, N.A. (incorporated herein by
reference to Exhibit 10.6 to Form 8-K filed on December 12, 2007)
10.57 Confirmation of Convertible Bond Hedge Transaction for 2011 Notes,
dated December 12, 2007, by and between The Great Atlantic & Pacific
Tea Company, Inc. and Lehman Brothers OTC Derivatives Inc.
(incorporated herein by reference to Exhibit 10.7 to Form 8-K filed
on December 12, 2007)
10.58 Confirmation of Convertible Bond Hedge Transaction for 2012 Notes,
dated December 12, 2007, by and between The Great Atlantic & Pacific
Tea Company, Inc. and Lehman Brothers OTC Derivatives Inc.
(incorporated herein by reference to Exhibit 10.8 to Form 8-K filed
on December 12, 2007)
10.59 Share Lending Agreement, dated December 12, 2007, by and between The
Great Atlantic & Pacific Tea Company, Inc. and Bank of America, N.A.
(incorporated herein by reference to Exhibit 10.9 to Form 8-K filed
on December 12, 2007)
10.60 Amendment No. 1 to Share Lending Agreement dated as of December 18,
2007, between The Great Atlantic & Pacific Tea Company, Inc. and
Bank of America, N.A. (incorporated herein by reference to Exhibit
10.1 to Form 8-K filed on December 17, 2007)
10.61 Share Lending Agreement, dated December 12, 2007, by and between The
Great Atlantic & Pacific Tea Company, Inc., Lehman Brothers
International (Europe) Limited and Lehman Brothers Inc.
(incorporated herein by reference to Exhibit 10.10 to Form 8-K filed
on December 12, 2007)
10.62 Amendment No. 1 to Share Lending Agreement dated as of December 18,
2007, among The Great Atlantic & Pacific Tea Company, Inc. and
Lehman Brothers International (Europe) Limited, as borrower, and
Lehman Brothers Inc., as
90
borrowing agent (incorporated herein by reference to Exhibit 10.2 to
Form 8-K filed on December 17, 2007)
16 Letter on Change in Certifying Accountant (incorporated herein by
reference to Forms 8-K filed on September 18, 2002 and September 24,
2002, and Form 8-K/A filed on September 24, 2002)
18 Preferability Letter Issued by PricewaterhouseCoopers LLP
(incorporated herein by reference to Exhibit 18 to Form 10-Q filed
on July 29, 2004)
23 Consent of Independent Registered Public Accounting Firm
(incorporated herein by reference to Exhibit 23.1 to Form 10-K filed
on April 25, 2007)
23.1 Consent of Independent Auditors from Ernst & Young LLP (incorporated
herein by reference to Exhibit 23.2 to Form 10-K filed on April 25,
2007)
23.2 Consent of Independent Registered Public Accounting Firm
(incorporated herein by reference to Exhibit 23.1 to Form 10-K filed
on August 24, 2007)
23.3 Consent of Independent Auditors from Ernst & Young LLP (incorporated
herein by reference to Exhibit 23.2 to Form 10-K filed on August 24,
2007)
23.4 Consent of Independent Registered Public Accounting Firm
(incorporated herein by reference to Exhibit 23.1 to Form 10-K filed
on October 24, 2007)
23.5 Consent of Independent Auditors from Ernst & Young LLP (incorporated
herein by reference to Exhibit 23.2 to Form 10-K filed on October
24, 2007)
31.1* Certification of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2* Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Revised February 24, 2007 Consolidated Financial Statements
(incorporated herein by reference to Exhibit 99.1 to Form 8-K filed
on August 24, 2007)
99.2 Revised February 24, 2007 Consolidated Financial Statements
(incorporated herein by reference to Exhibit 99.1 to Form 8-K filed
on October 24, 2007)
91
99.3 Metro, Inc. September 30, 2006 Consolidated Financial Statements
(incorporated herein by reference to Exhibit 99.2 to Form 10-K filed
on April 25, 2007)
* Filed with this 10-Q
92
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.
Dated: January 8, 2008 By: /s/ Melissa E. Sungela
-----------------------------------------------
Melissa E. Sungela, Vice President,
Corporate Controller (Chief Accounting Officer)
93
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
SECTION 302 CERTIFICATION
I, Eric Claus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusion
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this quarterly report based
on such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is likely to materially affect, the registrant's
internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Eric Claus Date: January 8, 2008
-----------------------
Eric Claus
President and
Chief Executive Officer
94
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
SECTION 302 CERTIFICATION
I, Brenda M. Galgano, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusion
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this quarterly report based
on such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is likely to materially affect, the registrant's
internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Brenda M. Galgano Date: January 8, 2008
-----------------------
Brenda M. Galgano
Senior Vice President,
Chief Financial Officer
95
Exhibit 32
CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SS. 1350)
The undersigned, Eric Claus, President and Chief Executive Officer of The Great
Atlantic & Pacific Tea Company, Inc. ("Company"), and Brenda M. Galgano, Senior
Vice President, Chief Financial Officer of the Company, each hereby certifies
that (1) the Quarterly Report of the Company on Form 10-Q for the period ended
December 1, 2007 fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 and (2) the information contained in the
Report fairly presents, in all material respects, the financial condition and
the results of operations of the Company.
Dated: January 8, 2008 /s/ Eric Claus
------------------------
Eric Claus
President
and
Chief Executive Officer
Dated: January 8, 2008 /s/ Brenda M. Galgano
------------------------
Brenda M. Galgano
Senior Vice President,
Chief Financial Officer
96