UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 9, 2006
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 AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT. YES [X] NO [_]
AS OF OCTOBER 13, 2006 THE REGISTRANT HAD A TOTAL OF 41,494,964 SHARES OF COMMON
STOCK - $1 PAR VALUE OUTSTANDING.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
12 Weeks Ended 28 Weeks Ended
------------------------------ ------------------------------
Sept. 9, 2006 Sept. 10, 2005 Sept. 9, 2006 Sept. 10, 2005
------------- -------------- ------------- --------------
Sales $ 1,572,250 $ 2,168,249 $ 3,699,145 $ 5,551,882
Cost of merchandise sold (1,090,859) (1,551,585) (2,579,603) (3,997,260)
----------- ----------- ----------- -----------
Gross margin 481,391 616,664 1,119,542 1,554,622
Store operating, general and administrative
expense (484,545) (761,730) (1,127,749) (1,737,828)
----------- ----------- ----------- -----------
Loss from operations (3,154) (145,066) (8,207) (183,206)
Gain (loss) on sale of Canadian operations 35 919,140 (291) 918,551
Interest expense (16,894) (25,262) (39,050) (61,385)
Interest income 2,124 3,157 6,627 4,343
Minority interest in earnings of consolidated
franchisees -- 405 -- (1,131)
Equity in earnings of Metro, Inc. 11,870 -- 19,817 --
----------- ----------- ----------- -----------
(Loss) income from continuing operations
before income taxes (6,019) 752,374 (21,104) 677,172
Benefit from (provision for) income taxes 5,511 (160,228) 15,170 (174,164)
----------- ----------- ----------- -----------
(Loss) income from continuing operations (508) 592,146 (5,934) 503,008
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax benefit of $0 and
$125 for the 12 weeks ended 9/9/06 and
9/10/05, respectively, and $0 and $196
for the 28 weeks ended 9/9/06 and
9/10/05, respectively (3) (171) (686) (268)
----------- ----------- ----------- -----------
Loss from discontinued operations (3) (171) (686) (268)
----------- ----------- ----------- -----------
Net (loss) income $ (511) $ 591,975 $ (6,620) $ 502,740
=========== =========== =========== ===========
Net (loss) income per share - basic:
Continuing operations $ (0.01) $ 14.64 $ (0.14) $ 12.65
Discontinued operations (0.00) (0.00) (0.02) (0.01)
----------- ----------- ----------- -----------
Net (loss) income per share - basic $ (0.01) $ 14.64 $ (0.16) $ 12.64
=========== =========== =========== ===========
Net (loss) income per share - diluted:
Continuing operations $ (0.01) $ 14.40 $ (0.14) $ 12.48
Discontinued operations (0.00) (0.00) (0.02) (0.01)
----------- ----------- ----------- -----------
Net (loss) income per share - diluted $ (0.01) $ 14.40 $ (0.16) $ 12.47
=========== =========== =========== ===========
Weighted average number of common shares
outstanding 41,470,799 40,434,194 41,362,113 39,758,780
Common stock equivalents 476,923 672,959 510,198 566,309
----------- ----------- ----------- -----------
Weighted average number of common and
common equivalent shares outstanding 41,947,722 41,107,153 41,872,311 40,325,089
=========== =========== =========== ===========
See Notes to Quarterly Report
2
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED 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 (Loss) Equity
---------- ------- ---------- ------------ ------------- -------------
28 WEEK PERIOD ENDED
SEPTEMBER 9, 2006
Balance at beginning of period 41,148,987 $41,149 $ 497,193 $ 126,432 $ 6,953 $ 671,727
Net loss (6,620) (6,620)
Other comprehensive income 12,687 12,687
Cash dividends on common stock -
$7.25 per share (299,089) (299,089)
Stock options exercised 314,131 314 4,487 4,801
Other share based awards 26,104 26 5,818 5,844
---------- ------- --------- --------- ------- ---------
Balance at end of period 41,489,222 $41,489 $ 208,409 $ 119,812 $19,640 $ 389,350
========== ======= ========= ========= ======= =========
28 WEEK PERIOD ENDED
SEPTEMBER 10, 2005
Balance at beginning of period 38,764,999 $38,765 $ 464,543 $(266,198) $(3,308) $ 233,802
Net income 502,740 502,740
Other comprehensive income 2,948 2,948
Stock options exercised 2,024,672 2,025 19,201 21,226
Other share based awards 5,303 5 4,922 4,927
---------- ------- --------- --------- ------- ---------
Balance at end of period 40,794,974 $40,795 $ 488,666 $ 236,542 $ (360) $ 765,643
========== ======= ========= ========= ======= =========
COMPREHENSIVE INCOME
12 Weeks Ended 28 Weeks Ended
------------------------------ ------------------------------
Sept. 9, 2006 Sept. 10, 2005 Sept. 9, 2006 Sept. 10, 2005
------------- -------------- ------------- --------------
Net (loss) income $ (511) $591,975 $(6,620) $502,740
------ -------- ------- --------
Foreign currency translation adjustment 773 6,883 12,302 2,920
Net unrealized loss on derivatives,
net of tax -- -- -- (57)
Net unrealized gain on marketable securities,
net of tax 499 85 385 85
------ -------- ------- --------
Other comprehensive income 1,272 6,968 12,687 2,948
------ -------- ------- --------
Total comprehensive income $ 761 $598,943 $ 6,067 $505,688
====== ======== ======= ========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BALANCES
Net Unrealized Accumulated
Foreign (Loss) Gain on Net Unrealized Minimum Other
Currency Marketable Gain (Loss) Pension Comprehensive
Translation Securities on Derivatives Liability Income (Loss)
----------- -------------- -------------- --------- -------------
Balance at February 25, 2006 $12,874 $(1,015) $ -- $(4,906) $ 6,953
Current period change 12,302 385 -- -- 12,687
------- ------- ---- ------- -------
Balance at September 9, 2006 $25,176 $ (630) $ -- $(4,906) $19,640
======= ======= ==== ======= =======
Balance at February 26, 2005 $ 3,035 $ -- $ 57 $(6,400) $(3,308)
Current period change 2,920 85 (57) -- 2,948
------- ------- ---- ------- -------
Balance at September 10, 2005 $ 5,955 $ 85 $ -- $(6,400) $ (360)
======= ======= ==== ======= =======
See Notes to Quarterly Report
3
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts)
September 9, 2006 February 25, 2006
----------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 83,250 $ 229,589
Restricted cash 77,346 146,309
Restricted marketable securities 84,487 --
Marketable securities -- 167,405
Accounts receivable, net of allowance for doubtful accounts
of $5,811 and $7,042 at September 9, 2006 and
February 25, 2006, respectively 110,489 175,939
Inventories 400,620 405,310
Prepaid expenses and other current assets 89,164 85,462
---------- ----------
Total current assets 845,356 1,210,014
---------- ----------
Non-current assets:
Property:
Property owned 894,978 875,140
Property leased under capital leases 22,152 23,094
---------- ----------
Property - net 917,130 898,234
Equity investment in Metro, Inc. 367,426 338,756
Other assets 50,255 51,861
---------- ----------
Total assets $2,180,167 $2,498,865
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 32,291 $ 569
Current portion of obligations under capital leases 1,906 2,274
Accounts payable 191,240 209,774
Book overdrafts 35,990 35,447
Accrued salaries, wages and benefits 110,020 121,734
Accrued taxes 31,050 34,215
Other accruals 156,497 206,260
---------- ----------
Total current liabilities 558,994 610,273
---------- ----------
Non-current liabilities:
Long-term debt 298,250 246,282
Long-term obligations under capital leases 31,567 32,270
Long-term real estate liabilities 296,592 297,453
Other non-current liabilities 605,414 640,860
---------- ----------
Total liabilities 1,790,817 1,827,138
---------- ----------
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 - 41,489,222 and 41,148,987
shares at September 9, 2006 and February 25, 2006, respectively 41,489 41,149
Additional paid-in capital 208,409 497,193
Accumulated other comprehensive income 19,640 6,953
Retained earnings 119,812 126,432
---------- ----------
Total stockholders' equity 389,350 671,727
---------- ----------
Total liabilities and stockholders' equity $2,180,167 $2,498,865
========== ==========
See Notes to Quarterly Report
4
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)
(Unaudited)
28 Weeks Ended
------------------------------
Sept. 9, 2006 Sept. 10, 2005
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (6,620) $ 502,740
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Asset disposition initiatives 4,920 145,720
Depreciation and amortization 95,219 117,768
Income tax benefit relating to the sale of our Canadian operations (17,269) --
Other non-current income taxes -- 137,228
Gain on disposal of owned property and write-down of property, net (10,825) (27,427)
Other property impairments 2,565 11,142
Loss (gain) on sale of Canadian operations 291 (918,551)
Loss on derivatives -- 15,446
Loss on early extinguishment of debt -- 28,623
Non-cash impact of early extinguishment of debt -- 809
Other share based awards 5,844 4,927
Equity in earnings of Metro, Inc. (19,817) --
Proceeds from dividends from Metro, Inc. 3,408 1,512
Other changes in assets and liabilities:
Decrease (increase) in receivables 69,415 (28,103)
Decrease in inventories 5,261 28,689
Increase in prepaid expenses and other current assets (11,791) (7,496)
(Increase) decrease in other assets (2,811) 73
Decrease in accounts payable (18,534) (74,420)
Decrease in accrued salaries, wages, benefits and taxes (15,342) (4,459)
(Decrease) increase in other accruals (49,763) 52,716
Increase in minority interest -- 1,806
Decrease in other non-current liabilities (19,432) (55,594)
Other operating activities, net 2,147 6,970
--------- ---------
Net cash provided by (used in) operating activities 16,866 (59,881)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (120,346) (109,577)
Proceeds from disposal of property 19,768 53,873
Proceeds from sale of Canadian operations, net of cash disposed -- 960,689
Disposal related expenditures for sale of Canadian operations (291) (46,464)
Decrease in restricted cash 68,963 --
Payments for derivatives -- (15,446)
Purchases of marketable securities (148,700) (306,266)
Proceeds from maturities of marketable securities 230,904 31,325
--------- ---------
Net cash provided by investing activities 50,298 568,134
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 624,900 --
Principal payments on long-term borrowings (540,946) (413,529)
Long term real estate liabilities (861) 1,310
Principal payments on capital leases (2,891) (7,997)
Proceeds from capital leases -- 10,000
Increase (decrease) in book overdrafts 543 (12,603)
Deferred financing fees (105) (1,638)
Dividends paid (299,089) --
Proceeds from exercises of stock options 4,801 21,226
--------- ---------
Net cash used in financing activities (213,648) (403,231)
Effect of exchange rate changes on cash and cash equivalents 145 595
--------- ---------
Net (decrease) increase in cash and cash equivalents (146,339) 105,617
Cash and cash equivalents at beginning of period 229,589 257,748
--------- ---------
Cash and cash equivalents at end of period $ 83,250 $ 363,365
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 12,953 $ 37,182
Income taxes $ 4,726 $ 7,254
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 Statements of Consolidated Operations for the 12 and 28 weeks
ended September 9, 2006 and September, 10, 2005, Statements of Consolidated
Stockholders' Equity and Comprehensive Income and Statements of Consolidated
Cash Flows for the 28 weeks ended September 9, 2006 and September 10, 2005, and
the Consolidated Balance Sheets at September 9, 2006 and February 25, 2006 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 Fiscal 2005
Annual Report on Form 10-K. 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. Significant intercompany accounts and transactions have been
eliminated. Our Company uses the equity method of accounting for our investment
in Metro, Inc. as we exert 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.
Certain reclassifications have been made to prior year amounts to conform to
current year presentation.
2. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In October 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position FAS 13-1 ("FSP FAS 13-1"), which requires companies to expense
rental costs associated with ground or building operating leases that are
incurred during a construction period. As a result, companies that are currently
capitalizing these rental costs are required to expense them beginning in its
first reporting period beginning after December 15, 2005. FSP FAS 13-1 is
effective for our Company as of the first quarter of fiscal 2006. We evaluated
the provisions of FSP FAS 13-1 and have adopted the guidance. This adoption did
not have a material impact on our Company's financial position or results of
operations.
In July 2006, the 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. This
Interpretation provides that the tax effects from an uncertain tax position can
be recognized in our financial statements, only if the position is more likely
than not of being sustained on audit, based on the technical merits of the
position. The provisions of FIN 48 are effective as of the beginning of fiscal
2007, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. We are currently evaluating the
impact of adopting FIN 48 on our financial statements.
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
6
are effective for fiscal years beginning after November 15, 2007. Our Company is
currently evaluating the impact, if any, of the provisions of SFAS 157.
In September 2006, the FASB issued SFAS 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") and is effective for our fiscal year
ended February 24, 2007. This standard requires companies to recognize, on a
prospective basis, the funded status of their defined benefit pension and other
postretirement benefit plans as a net liability or asset on their balance
sheets. We are currently evaluating the impact of adopting this standard on our
financial statements.
3. SPECIAL ONE-TIME DIVIDEND
On April 25, 2006, our Company paid a special one-time dividend to our
shareholders of record on April 17, 2006 equal to $7.25 per share. This dividend
payout totaling $299.1 million was considered a return of capital to our
shareholders and accordingly was recorded as a reduction of "Additional paid in
capital" in our Consolidated Balance Sheets at September 9, 2006. The
transaction was funded primarily by cash available on the balance sheet
resulting from the strategic restructuring of the Company during fiscal 2005.
Although we paid this one-time special dividend, our Company's practice is to
not pay dividends. As such, we have not made dividend payments in the previous
three years and do not intend to pay dividends in the normal course of business
in fiscal 2006. However, our Company is permitted, under the terms of our
Revolver, to pay cash dividends on common shares.
In connection with the payment of the special one-time dividend discussed above,
our Company also adjusted the number and/or price of all unexercised stock
options and nonvested performance restricted stock units as of April 12, 2006,
to ensure that an individual's right to purchase stock at an aggregate value
remained the same both before and after the special one-time dividend payment.
These adjustments did not have an impact on stock compensation expense for the
28 weeks ended September 9, 2006. Refer to Note 10 - Stock Based Compensation
for adjustments made to stock options outstanding and nonvested performance
restricted stock units as a result of the dividend.
4. EQUITY INVESTMENT IN METRO, INC.
We use the equity method of accounting to account for our investment in Metro,
Inc. on the basis that we have 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. The value of our equity investment in Metro, Inc.
based upon Metro, Inc.'s quoted market price was $526.2 million at September 9,
2006.
The following table summarizes the status and results of our Company's equity
investment in Metro, Inc. from February 25, 2006 through September 9, 2006:
7
Equity investment at February 25, 2006 $338,756
Dividends and distributions received (3,408)
Equity earnings in Metro, Inc. 19,817
Foreign currency translation 12,261
--------
Equity investment at September 9, 2006 $367,426
========
In accordance with Emerging Issues Task Force ("EITF") 01-2, "Interpretations of
APB Opinion No. 29," we have indefinitely deferred $171.7 million of the gain
resulting from the sale of our Canadian operations that directly related to the
economic interest we retained in Metro, Inc. We will record our equity earnings
or losses 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, during the 12 and 28 weeks ending
September 9, 2006, we recorded $11.9 million and $19.8 million, respectively, in
equity earnings relating to our equity investment in Metro, Inc. and included
this amount in "Equity in earnings of Metro, Inc." on our Statements of
Consolidated Operations.
The difference between the carrying value of our investment of $367.4 million
and the amount of our underlying equity in Metro, Inc.'s net assets of $234.5
million was $132.9 million.
Metro, Inc.'s summarized financial information, derived from its unaudited third
quarter ended July 1, 2006 and audited year ended September 24, 2005 financial
statements, is as follows (in millions):
July 1, 2006 Sept. 24, 2005
------------ --------------
Balance sheet:
Current assets $1,025.5 $ 833.9
Noncurrent assets 2,737.5 2,574.2
-------- --------
Total assets $3,763.0 $3,408.1
======== ========
Current liabilities $ 985.9 $ 914.7
Noncurrent liabilities * 1,288.8 1,180.2
-------- --------
Total liabilities $2,274.7 $2,094.9
======== ========
16 Weeks Ended 40 Weeks Ended 52 Weeks Ended
July 1, 2006 July 1, 2006 Sept. 24, 2005
-------------- -------------- --------------
Income statement:
Net sales $2,976.3 $7,334.3 $5,587.1
======== ======== ========
Cost of sales and
operating expenses $2,801.3 $6,921.7 $5,281.7
======== ======== ========
Net income $ 75.9 $ 154.4 $ 158.9
======== ======== ========
* Includes minority interests of $9.1 million for the third quarter ended
July 1, 2006 and $5.5 million for the year ended September 24, 2005.
5. CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND MARKETABLE SECURITIES
At September 9, 2006 and February 25, 2006, we had $77.3 million and $146.3
million, respectively, in restricted cash, which was held in a money market
fund, and can only be used as collateral for our new Letter of Credit Agreement
that we entered into during fiscal 2005. In addition, our marketable securities
of $84.5 million at September 9, 2006, held by Bank of America, can also only be
used as collateral for our new Letter of Credit Agreement that we entered into
during fiscal 2005.
8
The following is a summary of cash, cash equivalents, restricted cash, and
marketable securities at September 9, 2006 and February 25, 2006:
At September 9, 2006
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
--------- ---------- ---------- ---------
CLASSIFIED AS:
Cash $ 77,779 $-- $ -- $ 77,779
Cash equivalents:
Money market funds 5,471 -- -- 5,471
-------- --- ----- --------
Total cash and cash equivalents 83,250 -- -- 83,250
-------- --- ----- --------
Restricted cash 77,346 -- -- 77,346
Restricted marketable securities:
Corporate bonds 39,458 -- (171) 39,287
Securities of the U.S. government
and its agencies 45,659 -- (459) 45,200
-------- --- ----- --------
Total restricted marketable securities 85,117 -- (630) 84,487
-------- --- ----- --------
Total cash, cash equivalents, restricted
cash and marketable securities $245,713 $-- $(630) $245,083
======== === ===== ========
SECURITIES AVAILABLE-FOR-SALE:
Maturing within one year $ 44,929 $ 44,758
======== ========
Maturing greater than one year $ 45,659 $ 45,200
======== ========
At February 25, 2006
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
--------- ---------- ---------- ---------
CLASSIFIED AS:
Cash $ 78,414 $-- $ -- $ 78,414
Cash equivalents:
Money market funds 151,175 -- -- 151,175
-------- --- ------- --------
Total cash and cash equivalents 229,589 -- -- 229,589
-------- --- ------- --------
Restricted cash 146,309 -- -- 146,309
Marketable securities:
Corporate bonds 51,456 -- (457) 50,999
Securities of the U.S. government
and its agencies 45,943 -- (558) 45,385
Auction rate securities 71,021 -- -- 71,021
-------- --- ------- --------
Total marketable securities 168,420 -- (1,015) 167,405
-------- --- ------- --------
Total cash, cash equivalents, restricted
cash and marketable securities $544,318 $-- $(1,015) $543,303
======== === ======= ========
SECURITIES AVAILABLE-FOR-SALE:
Maturing within one year $233,921 $233,879
======== ========
Maturing greater than one year $ 85,674 $ 84,701
======== ========
9
The following table provides the breakdown of the investments with unrealized
losses at September 9, 2006 and February 25, 2006:
September 9, 2006
------------------------------------------------------------------
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 $39,287 $(171) $ -- $ -- $39,287 $(171)
Securities of the U.S.
government and its agencies -- -- 45,200 (459) 45,200 (459)
------- ----- ------- ----- ------- -----
Total $39,287 $(171) $45,200 $(459) $84,487 $(630)
======= ===== ======= ===== ======= =====
February 25, 2006
------------------------------------------------------------------
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 $11,683 $ (41) $39,316 $(416) $50,999 $ (457)
Securities of the U.S.
government and its agencies -- -- 45,385 (558) 45,385 (558)
------- ----- ------- ----- ------- -------
Total $11,683 $ (41) $84,701 $(974) $96,384 $(1,015)
======= ===== ======= ===== ======= =======
Corporate bonds: Our unrealized losses on our investments in corporate bonds
were caused by interest rate increases by the Federal Reserve. The contractual
terms of those investments do not permit the issuer to settle the security at a
price less than the amortized cost of the investment. We believe it is probable
that we will be able to collect all amounts due according to the contractual
terms of these investments. Therefore, it is expected that the debentures would
not be settled at a price less than the amortized cost of the investment.
Because we have the ability and intent to hold those investments until a
recovery of fair value, which may be maturity, we do not consider those
investments to be other-than-temporarily impaired at September 9, 2006 and
February 25, 2006, respectively.
Securities of the U.S. government and its agencies: Our unrealized losses on our
investments in securities of the U.S. government and its agencies were caused by
interest rate increases by the Federal Reserve. The contractual terms of those
investments do not permit the issuer to settle the securities at a price less
than the amortized cost of the investment. Because we have the ability and
intent to hold those investments until a recovery of fair value, which may be
maturity, we do not consider those investments to be other-than-temporarily
impaired at September 9, 2006 and February 25, 2006, respectively.
10
Gross realized losses on sales of investments were nil and $0.05 million for the
12 and 28 weeks ended September 9, 2006, respectively. There were no gross
realized gains or losses on sales of investments for the 12 and 28 weeks ended
September 10, 2005.
6. VALUATION OF LONG-LIVED ASSETS
In accordance with SFAS 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 28 weeks ended September 9, 2006, we recorded impairment
losses on long-lived assets of $1.3 million and $3.6 million, respectively.
During the 12 and 28 weeks ended September 10, 2005 we recorded impairment
losses on long-lived assets of $20.2 million and $26.6 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 28 weeks ended September 9, 2006, we recorded impairment
losses on property of $1.3 million and $2.5 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 $1.5 million, in impairment losses on
property related to stores that were closed or converted in the normal course of
business during the 12 and 28 weeks ended September 10, 2005, respectively.
These amounts were included in "Store operating, general and administrative
expense" in our Statements of Consolidated Operations.
Impairments due to unrecoverable assets
Through the second quarter of fiscal 2005, we experienced operating losses for
two of the past three years for one of our United States' asset groups, located
in Long Island, New York, which we believe was a triggering event under SFAS 144
for potential impairment of the asset group's long-lived assets. Thus, we
reviewed the carrying value of this asset group for potential impairment, and
based upon internal analysis, we estimated the asset group's future cash flows
from its long-lived assets, which primarily consisted of equipment and leasehold
improvements. As this asset group's carrying value was not recoverable from its
future cash flows, we determined the fair value of the related assets based on
the same analysis, primarily using the discounted cash flow approach. As a
result of this review, we recorded an impairment charge for the asset group's
long-lived assets of $9.6 million as a component of operating loss in "Store
operating, general and administrative expense" in our Statements of Consolidated
Operations for the 12 and 28 weeks ended September 10, 2005. There were no such
amounts recorded during the 12 and 28 weeks ended September 9, 2006.
Impairments related to our Asset Disposition Initiatives
During the 12 and 28 weeks ended September 9, 2006, we recorded impairment
losses on property of nil and $1.1 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,
11
general and administrative expense" in our Consolidated Statements of Operations
for the 12 and 28 weeks ended September 9, 2006.
During the 12 and 28 weeks ended September 10, 2005, we recorded impairment
losses on property of $9.6 million and $15.5 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 Statements of
Consolidated Operations for the 12 and 28 weeks ended September 10, 2005.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
7. DISCONTINUED OPERATIONS
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.
During fiscal 2003, we adopted a formal plan to exit the New England and
Milwaukee, Wisconsin markets, as well as our Eight O'Clock Coffee business,
through the sale and/or disposal of these assets.
Summarized below are the operating results for these discontinued businesses,
which are included in our Statements of Consolidated Operations, under the
caption "Loss from operations of discontinued businesses, net of tax" for the 12
and 28 weeks ending September 9, 2006 and September 10, 2005.
12 Weeks ended September 9, 2006
--------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
----------- ------ ------- -----
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ -- $ -- $-- $ --
Operating expenses (11) 8 -- (3)
---- ---- --- ----
(Loss) income from operations of
discontinued businesses, before tax (11) 8 -- (3)
Tax provision -- -- -- --
---- ---- --- ----
(Loss) income from operations of
discontinued businesses, net of tax $(11) $ 8 $-- $ (3)
==== ==== === ====
Disposal related costs included in
operating expenses above:
Non-accruable closing costs $(11) $(46) $-- $(57)
Severance and benefits -- 146 -- 146
Interest accretion on present value of
future occupancy costs -- (92) -- (92)
---- ---- --- ----
Total disposal related costs $(11) $ 8 $-- $ (3)
---- ---- --- ----
12
12 Weeks Ended September 10, 2005
--------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
----------- ------ ------- -----
LOSS FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ -- $ -- $ -- $ --
Operating expenses (10) (245) (41) (296)
---- ----- ---- -----
Loss from operations of
discontinued businesses, before
tax (10) (245) (41) (296)
Tax benefit 4 104 17 125
---- ----- ---- -----
Loss from operations of
discontinued businesses, net
of tax $ (6) $(141) (24) $(171)
==== ===== ==== =====
Disposal related costs included in
operating expenses above:
Non-accruable closing costs $(10) $ (93) $(41) $(144)
Interest accretion on present
value of future occupancy costs -- (152) -- (152)
---- ----- ---- -----
Total disposal related costs $(10) $(245) $(41) $(296)
---- ----- ---- -----
28 Weeks ended September 9, 2006
--------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
----------- ------ ------- -----
LOSS FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ -- $ -- $-- $ --
Operating expenses (25) (661) -- (686)
---- ----- --- -----
Loss from operations of
discontinued businesses, before
tax (25) (661) -- (686)
Tax provision -- -- -- --
---- ----- --- -----
Loss from operations of
discontinued businesses, net of
tax $(25) $(661) $-- $(686)
==== ===== === =====
Disposal related costs included in
operating expenses above:
Non-accruable closing costs $(25) $ (42) $-- $ (67)
Severance and benefits -- 146 -- 146
Vacancy costs -- (541) -- (541)
Interest accretion on present
value of future occupancy costs -- (224) -- (224)
---- ----- --- -----
Total disposal related costs $(25) $(661) $-- $(686)
---- ----- --- -----
13
28 Weeks Ended September 10, 2005
--------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
----------- ------ ------- -----
LOSS FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ -- $ -- $ -- $ --
Operating expenses (37) (376) (51) (464)
---- ----- ---- -----
Loss from operations of
discontinued businesses, before
tax (37) (376) (51) (464)
Tax benefit 15 160 21 196
---- ----- ---- -----
Loss from operations of
discontinued businesses, net
of tax $(22) $(216) $(30) $(268)
==== ===== ==== =====
Disposal related costs included in
operating expenses above:
Non-accruable closing costs $(37) $ (18) $(51) $(106)
Interest accretion on present
value of future occupancy costs -- (358) -- (358)
---- ----- ---- -----
Total disposal related costs $(37) $(376) $(51) $(464)
---- ----- ---- -----
NORTHERN NEW ENGLAND
During the 12 and 28 weeks ended September 9, 2006, we incurred additional costs
in this region subsequent to the sale of these stores of $0.01 million and $0.02
million, respectively, primarily related to adjustments as a result of changes
in estimates. Similarly, during the 12 and 28 weeks ended September 10, 2005, we
incurred additional costs subsequent to the sale of these stores of $0.01
million and $0.04 million, respectively, primarily related to adjustments as a
result of changes in estimates. These amounts were included in "Loss from
operations of discontinued businesses, net of tax" on our Statements of
Consolidated Operations for the 12 and 28 weeks ended September 9, 2006 and
September 10, 2005, respectively.
KOHL'S MARKET
During the 12 and 28 weeks ended September 9, 2006, we recorded costs of nil and
$0.7 million, respectively, primarily due to interest accretion on future
occupancy payments that were recorded at present value at the time of the
original charge and adjustments as a result of changes in estimates. During the
12 and 28 weeks ended September 10, 2005, we recorded costs of $0.3 million and
$0.4 million, respectively, primarily due to interest accretion on future
occupancy payments that were recorded at present value at the time of the
original charge and adjustments as a result of changes in estimates. These
amounts were included in "Loss from operations of discontinued businesses, net
of tax" on our Statements of Consolidated Operations for the 12 and 28 weeks
ended September 9, 2006 and September 10, 2005.
The following table summarizes the reserve activity related to the exit of the
Kohl's market since the charge was recorded through the 28 weeks ended September
9, 2006:
14
Severance
and Fixed
Occupancy Benefits Assets Total
--------- --------- -------- --------
Fiscal 2003 charge(1) $25,487 $13,062 $ 18,968 $ 57,517
Additions (2) 352 -- -- 352
Utilization (3) (5,342) (8,228) (18,968) (32,538)
Adjustments (4) (1,458) -- -- (1,458)
------- ------- -------- --------
Balance at February 28, 2004 $19,039 $ 4,834 $ -- $ 23,873
Additions (2) 688 52 602 1,342
Utilization (3) (1,918) (2,201) (602) (4,721)
Adjustments (4) (354) -- -- (354)
------- ------- -------- --------
Balance at February 26, 2005 $17,455 $ 2,685 $ -- $ 20,140
Additions(2) 562 44 -- 606
Utilization (3) (3,235) (2,128) -- (5,363)
Adjustments (4) (4,299) 582 -- (3,717)
------- ------- -------- --------
Balance at February 25, 2006 $10,483 $ 1,183 $ -- $ 11,666
Additions (2) 220 4 -- 224
Utilization (3) (1,360) (1,041) -- (2,401)
Adjustments (4) 541 (146) -- 395
------- ------- -------- --------
Balance at September 9, 2006 $ 9,884 $ -- $ -- $ 9,884
======= ======= ======== ========
(1) The fiscal 2003 charge to occupancy consists of $25.5 million related to
future occupancy costs such as rent, common area maintenance and real
estate taxes. The fiscal 2003 charge to severance and benefits of $13.1
million related to severance costs of $6.6 million and costs for future
obligations for early withdrawal from multi-employer union pension plans
and a health and welfare plan of $6.5 million. The fiscal 2003 charge to
property of $18.9 million represents the impairment losses at certain
Kohl's locations.
(2) The fiscal 2003, fiscal 2004, fiscal 2005 and the year to date second
quarter of fiscal 2006 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.
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.
(3) 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.
(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 2003, we recorded net
adjustments of $1.5 million primarily related to reversals of previously
accrued vacancy costs due to favorable results of terminating and
subleasing certain locations of $4.5 million offset by additional vacancy
accruals of $3.0 million. 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 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 the 28 weeks ended September 9, 2006,
we recorded adjustments for (i.) additional vacancy related costs for our
properties of $0.5 million due to changes in our estimation of such future
costs and (ii.) a reversal of previously accrued pension withdrawal
payments of $0.1 million that were no longer required to be paid.
We paid $11.9 million of the total occupancy charges from the time of the
original charge through September 9, 2006 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 $9.9 million relates to
expected future payments under long term leases and is expected to be paid out
in full by 2020.
15
We paid $13.6 million of the total severance and benefits charges from the time
of the original charges through September 9, 2006, which resulted from the
termination of approximately 2,000 employees. At September 9, 2006, there are no
future obligations for severance and benefits.
At September 9, 2006 and February 25, 2006, $2.6 million and $3.7 million,
respectively, of the Kohl's exit reserves were included in "Other accruals" and
$7.3 million and $8.0 million, respectively, were included in "Other non-current
liabilities" on our Consolidated Balance Sheets. We have evaluated the liability
balance of $9.9 million as of September 9, 2006 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.
EIGHT O'CLOCK COFFEE
During fiscal 2003, we completed the sale of our Eight O'Clock Coffee business,
generating gross proceeds of $107.5 million and a net gain after transaction
related costs of $85.0 million ($49.3 million after tax). The sale of the coffee
business also included a contingent note for up to $20.0 million, the value and
payment of which is based upon certain elements of the future performance of the
Eight O'Clock Coffee business and therefore is not included in the gain.
During the 12 and 28 weeks ended September 10, 2005, we incurred additional
costs to wind down our operations in this business subsequent to the sale of
$0.04 million and $0.05 million, respectively. These amounts were included in
"Loss from operations of discontinued businesses, net of tax" on our Statements
of Consolidated Operations for the 12 and 28 weeks ended September 10, 2005.
There were no such costs incurred during the 12 and 28 weeks ended September 9,
2006.
16
8. ASSET DISPOSITION INITIATIVES
Presented below is a reconciliation of the charges recorded on our Consolidated
Balance Sheets, Statements of Consolidated Operations and Statements of
Consolidated Cash Flows for the 12 and 28 weeks ended September 9, 2006 and
September 10, 2005. 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 146 "Accounting for Costs Associated with Exit or Disposal Activities".
12 weeks ended September 9, 2006
------------------------------------------------------------------------------
U.S.
Project 2001 Farmer Closure of Distribution
Great Asset Jack Stores in Operations and
Renewal Disposition Restructuring the Midwest Warehouses Total
------- ----------- ------------- ----------- -------------- -------
BALANCE SHEET ACCRUALS
Vacancy $(468) $ -- $ -- $(2,183) $ 871 $(1,780)
PV interest 215 324 171 841 52 1,603
Severance (95) -- -- -- (406) (501)
----- ----- ----- ------- ----- -------
Total accrued to
balance sheet (348) 324 171 (1,342) 517 (678)
----- ----- ----- ------- ----- -------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs -- -- -- -- -- --
Inventory related costs -- -- -- -- -- --
Gain on sale of property -- -- -- (46) (4) (50)
Closing costs -- -- -- 24 156 180
----- ----- ----- ------- ----- -------
Total non-accruable items -- -- -- (22) 152 130
----- ----- ----- ------- ----- -------
Less PV interest (215) (324) (171) (841) (52) (1,603)
----- ----- ----- ------- ----- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS EXCLUDING
PV INTEREST (563) -- -- (2,205) 617 (2,151)
===== ===== ===== ======= ===== =======
Less closing costs -- -- -- (24) (156) (180)
----- ----- ----- ------- ----- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
CASH FLOWS $(563) $ -- $ -- $(2,229) $ 461 $(2,331)
===== ===== ===== ======= ===== =======
17
12 weeks ended September 10, 2005
------------------------------------------------------------------------------
U.S.
Project 2001 Farmer Closure of Distribution
Great Asset Jack Stores in Operations and
Renewal Disposition Restructuring the Midwest Warehouses Total
------- ----------- ------------- ----------- -------------- -------
BALANCE SHEET ACCRUALS
Vacancy $(2,570) $ -- $3,360 $56,752 $ 3,400 $60,942
PV interest 375 519 143 136 -- 1,173
Severance -- -- -- 782 6,410 7,192
------- ----- ------ ------- ------- -------
Total accrued to
balance sheets (2,195) 519 3,503 57,670 9,810 69,307
------- ----- ------ ------- ------- -------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs -- -- -- 6,735 2,779 9,514
Inventory related costs -- -- -- 544 1,211 1,755
Loss on sale of property -- -- -- 3,215 -- 3,215
Closing costs -- -- -- 2,525 5,140 7,665
------- ----- ------ ------- ------- -------
Total non-accruable items -- -- -- 13,019 9,130 22,149
------- ----- ------ ------- ------- -------
Less PV interest (375) (519) (143) (136) -- (1,173)
------- ----- ------ ------- ------- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS EXCLUDING
PV INTEREST (2,570) -- 3,360 70,553 18,940 90,283
======= ===== ====== ======= ======= =======
Less closing costs -- -- -- (2,525) (5,140) (7,665)
------- ----- ------ ------- ------- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
CASH FLOWS $(2,570) $ -- $3,360 $68,028 $13,800 $82,618
======= ===== ====== ======= ======= =======
18
28 weeks ended September 9, 2006
------------------------------------------------------------------------------
U.S.
Project 2001 Farmer Closure of Distribution
Great Asset Jack Stores in Operations and
Renewal Disposition Restructuring the Midwest Warehouses Total
------- ----------- ------------- ----------- -------------- -------
BALANCE SHEET ACCRUALS
Vacancy $(1,633) $4,433 $(3,021) $ 2,857 $ 1,744 $ 4,380
PV interest 559 850 405 1,982 131 3,927
Severance (95) -- -- (20) 135 20
------- ------ ------- ------- ------- -------
Total accrued to
balance sheets (1,169) 5,283 (2,616) 4,819 2,010 8,327
------- ------ ------- ------- ------- -------
NON-ACCRUABLE ITEMS RECORDED
ON STATEMENTS OF OPERATIONS
Property writeoffs -- -- -- -- 1,049 1,049
Inventory related costs -- -- -- -- (571) (571)
Gain on sale of property -- -- -- 46 (4) 42
Closing costs -- -- -- 93 2,075 2,168
------- ------ ------- ------- ------- -------
Total non-accruable items -- -- -- 139 2,549 2,688
------- ------ ------- ------- ------- -------
Less PV interest (559) (850) (405) (1,982) (131) (3,927)
------- ------ ------- ------- ------- -------
TOTAL AMOUNT RECORDED ON
STATEMENTS OF OPERATIONS
EXCLUDING PV INTEREST (1,728) 4,433 (3,021) 2,976 4,428 7,088
------- ------ ------- ------- ------- -------
Less closing costs -- -- -- (93) (2,075) (2,168)
------- ------ ------- ------- ------- -------
TOTAL AMOUNT RECORDED ON
STATEMENTS OF CASH FLOWS $(1,728) $4,433 $(3,021) $ 2,883 $ 2,353 $ 4,920
======= ====== ======= ======= ======= =======
19
28 weeks ended September 10, 2005
-------------------------------------------------------------------------------
U.S.
Project 2001 Farmer Closure of Distribution
Great Asset Jack Stores in Operations and
Renewal Disposition Restructuring the Midwest Warehouses Total
------- ----------- ------------- ----------- -------------- --------
BALANCE SHEET ACCRUALS
Vacancy $(2,570) $ -- $3,360 $71,518 $ 3,400 $ 75,708
PV interest 900 1,232 337 136 -- 2,605
Severance -- -- -- 2,119 46,827 48,946
------- ------- ------ ------- ------- --------
Total accrued to balance
sheets (1,670) 1,232 3,697 73,773 50,227 127,259
------- ------- ------ ------- ------- --------
NON-ACCRUABLE ITEMS RECORDED
ON STATEMENTS OF
OPERATIONS
Property writeoffs -- -- -- 6,861 8,571 15,432
Inventory related costs -- -- -- 1,130 2,241 3,371
Loss on sale of property -- -- -- 2,263 -- 2,263
Gain on sale of pharmacy
scripts -- -- -- (870) -- (870)
Closing costs -- -- -- 2,957 5,860 8,817
------- ------- ------ ------- ------- --------
Total non-accruable items -- -- -- 12,341 16,672 29,013
------- ------- ------ ------- ------- --------
Less PV interest (900) (1,232) (337) (136) -- (2,605)
------- ------- ------ ------- ------- --------
TOTAL AMOUNT RECORDED ON
STATEMENTS OF OPERATIONS
EXCLUDING PV INTEREST (2,570) -- 3,360 85,978 66,899 153,667
------- ------- ------ ------- ------- --------
Less Gain on sale of
pharmacy scripts -- -- -- 870 -- 870
Less closing costs -- -- -- (2,957) (5,860) (8,817)
------- ------- ------ ------- ------- --------
TOTAL AMOUNT RECORDED ON
STATEMENTS OF CASH FLOWS $(2,570) $ -- $3,360 $83,891 $61,039 $145,720
======= ======= ====== ======= ======= ========
20
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 22, 2003 $ 48,788 $ 487 $ 49,275 $2,446 $-- $2,446 $ 51,234 $ 487 $ 51,721
Addition (1) 2,276 372 2,648 -- -- -- 2,276 372 2,648
Utilization (2) (19,592) (407) (19,999) (289) -- (289) (19,881) (407) (20,288)
-------- ----- -------- ------ --- ------ -------- ----- --------
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) 559 -- 559 -- -- -- 559 -- 559
Utilization (2) (2,504) -- (2,504) (66) -- (66) (2,570) -- (2,570)
Adjustments (3) (1,633) -- (1,633) (95) -- (95) (1,728) -- (1,728)
-------- ----- -------- ------ --- ------ -------- ----- --------
Balance at
September 9, 2006 $ 16,421 $ -- $ 16,421 $1,276 $-- $1,276 $ 17,697 $ -- $ 17,697
======== ===== ======== ====== === ====== ======== ===== ========
(1) The additions to store occupancy of $2.6 million, $1.9 million, and $1.5
million during fiscal 2003, 2004 and 2005, respectively, and $0.6 million
during the 28 weeks ended September 9, 2006 represent the interest
accretion on future occupancy costs which were recorded at present value at
the time of the original charge.
(2) Occupancy utilization of $20.0 million, $5.6 million, and $6.0 million for
fiscal 2003, 2004 and 2005, respectively, and $2.5 million during the 28
weeks ended September 9, 2006 represents payments made during those periods
for costs such as rent, common area maintenance, real estate taxes and
lease termination costs. Severance utilization of $0.3 million, $0.5
million, and $0.2 million for fiscal 2003, 2004 and 2005, respectively, and
$0.07 million during the 28 weeks ended September 9, 2006 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. During the 28 weeks ended September 9, 2006, we recorded adjustments
for a reduction in vacancy related costs for our properties of $1.6 million
due to 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.
We paid $106.9 million of the total occupancy charges from the time of the
original charges through September 9, 2006 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $30.2 million of the total net severance charges from
the time of the original charges through September 9, 2006, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $16.4 million relates to expected future payments under long term
leases and is expected to be paid in full by 2020. The remaining severance
liability of $1.3 million primarily relates to expected future payments for
early
21
withdrawals from multi-employer union pension plans and will be fully paid out
in 2020. None of these stores were open during the 12 and 28 weeks ended
September 9, 2006 and September 10, 2005.
At September 9, 2006 and February 25, 2006, approximately $4.2 million and $5.1
million, respectively, of the reserve were included in "Other accruals" and the
remaining amounts were included in "Other non-current liabilities" on our
Company's Consolidated Balance Sheets.
Based upon current available information, we evaluated the reserve balances as
of September 9, 2006 of $17.7 million for this phase of the asset disposition
initiative and have concluded that they are 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 22, 2003 $53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140
Addition (1) 2,847 3 2,850 -- -- -- 2,847 3 2,850
Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444)
Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218)
------- ------ -------- ------- ------- ------- -------- ------- --------
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) 850 -- 850 -- -- -- 850 -- 850
Utilization (2) (7,412) -- (7,412) -- -- -- (7,412) -- (7,412)
Adjustments (3) 4,433 -- 4,433 -- -- -- 4,433 -- 4,433
------- ------ -------- ------- ------- ------- -------- ------- --------
Balance at
September 9, 2006 $24,589 $ -- $ 24,589 $ 17 $ -- $ 17 $ 24,606 $ -- $ 24,606
======= ====== ======== ======= ======= ======= ======== ======= ========
(1) The additions to store occupancy of $2.9 million, $2.4 million, and $2.2
million during fiscal 2003, 2004 and 2005, respectively, and $0.9 million
during the 28 weeks ended September 9, 2006 represent the interest
accretion on future occupancy costs which were recorded at present value at
the time of the original charge.
(2) Occupancy utilization of $11.0 million, $6.0 million, and $5.3 million
during fiscal 2003, 2004 and 2005, respectively, and $7.4 million during
the 28 weeks ended September 9, 2006 represent payments made during those
periods for costs such as rent, common area maintenance, real estate taxes
and lease termination costs. Severance utilization of $3.5 million, $2.3
million, and $0.1 million during fiscal 2003, 2004 and 2005, respectively,
represent 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 2003, we recorded net
adjustments of $5.8 million related to reversals of previously accrued
occupancy costs due to favorable results of subleasing, assigning and
terminating leases. We also accrued $1.6 million for additional severance
and benefit costs that were unforeseen at the time of the original charge.
During fiscal 2004, we recorded adjustments of $4.5 million related to the
reversals of
22
previously accrued occupancy costs due to the disposals and subleases of
locations at more 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. Finally, during the 28 weeks ended September 9, 2006, we
recorded adjustments for additional vacancy related costs of $4.4 million
due to changes in our estimation of such future costs.
We paid $51.8 million ($48.8 million in the U.S. and $3.0 million in Canada) of
the total occupancy charges from the time of the original charges through
September 9, 2006 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
September 9, 2006, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $24.6 million primarily relates
to expected future payments under long term leases through 2022. The remaining
severance liability of $0.02 million relates to expected future payments for
severance and benefits payments to individual employees and will be fully paid
out by 2006. None of these stores were open during the 12 and 28 weeks ended
September 9, 2006 and September 10, 2005.
At September 9, 2006 and February 25, 2006, approximately $5.9 million and $6.6
million of the reserve, respectively, were included in "Other accruals" and the
remaining amounts were included in "Other non-current liabilities" on our
Company's Consolidated Balance Sheets.
Based upon current available information, we evaluated the reserve balances as
of September 9, 2006 of $24.6 million for this phase of the asset disposition
initiative and have concluded that they are 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.
FARMER JACK RESTRUCTURING
The following table summarizes the activity to date related to the charges
recorded for this initiative all of which were in the U.S.
Severance
and
Occupancy Benefits Total
--------- --------- -------
Original charge (1) $20,999 $ 8,930 $29,929
Addition (1) 56 -- 56
Utilization (2) (1,093) (4,111) (5,204)
------- ------- -------
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) 405 -- 405
Utilization (2) (886) -- (886)
Adjustment (3) (3,021) -- (3,021)
------- ------- -------
Balance at September 9, 2006 $14,748 $ -- $14,748
======= ======= =======
23
(1) The original charge to occupancy during fiscal 2003 represents charges
related to closures and conversions in the Detroit, Michigan market of
$21.0 million. The additions to occupancy during fiscal 2003, fiscal 2004,
fiscal 2005 and the 28 weeks ended September 9, 2006 represent interest
accretion on future occupancy costs which were recorded at present value at
the time of the original charge. The original charge to severance during
fiscal 2003 of $8.9 million related to individual severings as a result of
the store closures, as well as a voluntary termination plan initiated in
the Detroit, Michigan market.
(2) Occupancy utilization of $1.1 million, $4.7 million, $2.7 million and $0.9
million during fiscal 2003, fiscal 2004, fiscal 2005 and for the 28 weeks
ended September 9, 2006, respectively, represents payments made for costs
such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance utilization of $4.1 million, $4.8 million, and
$0.01 million during fiscal 2003, fiscal 2004, and fiscal 2005,
respectively, represent 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 the 28 weeks ended
September 9, 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.
We paid $9.5 million of the total occupancy charges from the time of the
original charge through September 9, 2006 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 $14.7 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 September 9, 2006, which resulted from
the termination of approximately 300 employees. The severance liability has been
fully utilized as of September 9, 2006 and no additional future payments for
severance and benefits to individual employees will be paid out. None of these
stores were open during the 12 and 28 weeks ended September 9, 2006 and
September 10, 2005.
At September 9, 2006 and February 25, 2006, approximately $1.3 million and $1.6
million, respectively, of the liability were included in "Other accruals" and
the remaining amounts were included in "Other non-current liabilities" on our
Consolidated Balance Sheets.
We have evaluated the liability balance of $14.7 million as of September 9, 2006
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.
CLOSURE OF STORES IN THE MIDWEST
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 have 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 September
9, 2006. The remaining business located in the Midwestern United States will
continue to operate as part of our core business going forward.
24
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) 1,982 -- 1,982
Utilization (3) (8,590) (207) (8,797)
Adjustment (4) 2,857 (20) 2,837
------- ------- --------
Balance at
September 9, 2006 $85,889 $ -- $ 85,889
======= ======= ========
(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 occupancy during the 28 weeks ended September 9, 2006
represent interest accretion on future occupancy costs which were recorded
at present value at the time of the original charge in the amount of $2.0
million. The additional charge to severance during fiscal 2005 of $1.4
million related to individual severings as a result of the additional
stores identified for closures.
(3) Occupancy utilization of $9.5 million and $8.6 million for fiscal 2005 and
the 28 weeks ended September 9, 2006, respectively, represents payments
made for costs such as rent, common area maintenance, real estate taxes and
lease termination costs. Severance utilization of $2.4 million and $0.2
million for fiscal 2005 and the 28 weeks ended September 9, 2006,
respectively, 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
recorded a decrease of $0.04 million for the reversal of previously accrued
severance and benefits due to changes in individual severings and
associated benefit costs. During the 28 weeks ended September 9, 2006, we
recorded adjustments for additional vacancy related costs for our
properties of $2.9 million due to changes in our estimation of such future
costs. 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.
We paid $18.1 million of the total occupancy charges from the time of the
original charge through September 9, 2006 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $2.6 million of the total net severance charges from
the time of the original charges through September 9, 2006, which resulted from
the termination of approximately 125 employees. The remaining occupancy
liability of $85.9 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2025. The severance liability
has been fully utilized as of September 9, 2006 and no additional future
payments for severance and benefits to individual employees will be paid out.
Included in the Statements of Consolidated Operations for the 12 and 28 weeks
ended September 9, 2006 and September 10, 2005 are the sales and operating
results of the 35 stores that were closed as part of this divestiture. The
results of these operations are as follows:
25
12 Weeks Ended 28 Weeks Ended
---------------------------- ----------------------------
September 9, September 10, September 9, September 10,
2006 2005 2006 2005
------------ ------------- ------------ -------------
Sales $-- $19,411 $-- $107,888
=== ======= === ========
Loss from operations $-- $(4,629) $-- $(13,496)
=== ======= === ========
At September 9, 2006 and February 25, 2006, approximately $17.7 million and
$22.5 million of the liability were included in "Other accruals" and the
remaining amounts were included in "Other non-current liabilities" on our
Consolidated Balance Sheets.
We have evaluated the liability balance of $85.9 million as of September 9, 2006
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.
U.S DISTRIBUTION OPERATIONS AND WAREHOUSES
During fiscal 2005, our Company entered into definitive agreements, including an
Asset Purchase Agreement and a 15 year Supply Agreement, selling our U.S.
distribution operations and some warehouse facilities and related assets to C&S
Wholesale Grocers, Inc. 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 second quarter of fiscal 2005 and was
completed during the fourth quarter of fiscal 2005.
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) 131 -- 131
Utilization (3) (11,770) (1,767) (13,537)
Adjustment (4) 1,744 135 1,879
-------- -------- --------
Balance at
September 9, 2006 $ 5,188 $ 1,991 $ 7,179
======== ======== ========
26
(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 the 28 weeks ended September 9, 2006
represent interest accretion on future occupancy costs which were recorded
at present value at the time of the original charge in the amount of $0.1
million. The additions to severance and benefits during fiscal 2005
represented charges related to additional individual severings as well as
retention and productivity incentives that were accrued as earned.
(3) Occupancy utilization of $0.3 million and $11.8 million for fiscal 2005 and
the 28 weeks ended September 9, 2006, respectively, represents payments
associated with the closure of certain warehouses. Severance and benefits
utilization of $43.6 million and $1.8 million for fiscal 2005 and the 28
weeks ended September 9, 2006, respectively, 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 the 28 weeks ended September 9, 2006, we
recorded adjustments for additional vacancy related costs for our
properties of $1.7 million due to changes in our estimation of such future
costs. During the 28 weeks ended September 9, 2006, we recorded adjustments
of $0.1 million primarily related to additions to severance and benefits
due to changes in individual severings and associated benefit costs.
We paid $12.1 million of the total occupancy charges from the time of the
original charge through September 9, 2006 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $45.4 million of the total net severance and benefits
charges from the time of the original charges through September 9, 2006, which
resulted from the termination of approximately 140 employees. The remaining
occupancy liability of $5.2 million relates to expected future payments under
long term leases and is expected to be paid out in full by 2026. The remaining
severance and benefits liability of $2.0 million relates to expected future
payments for severance and benefits to individual employees and will be fully
paid out by February 23, 2008.
As of September 9, 2006 and February 25, 2006, approximately $0.3 million and
$1.4 million, respectively, of the liability were included in "Accrued salaries,
wages and benefits," $1.6 million and $11.3 million, respectively, of the
liability were included in "Other Accruals" and the remaining amount was
included in "Other non-current liabilities" on our Consolidated Balance Sheets.
We have evaluated the liability balance of $7.2 million as of September 9, 2006
based upon current available information and have concluded that it is adequate.
We will continue to monitor the status of the warehouses and adjustments to the
reserve balance 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 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.
27
9. RETIREMENT PLANS AND BENEFITS
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. The
components of net pension cost were as follows:
For the 12 Weeks Ended
--------------------------------------
September 9, 2006 September 10, 2005
----------------- ------------------
U.S. Canada U.S. Canada
------- ------ ------- -------
Service cost $ 1,220 $-- $ 1,384 $ 1,537
Interest cost 2,611 -- 2,744 2,190
Expected return on plan assets (2,850) -- (3,098) (2,812)
Amortization of unrecognized net prior
service (gain) cost (41) -- (67) 96
Amortization of unrecognized net loss 37 -- 13 302
Administrative expenses and other 117 -- -- 46
------- --- ------- -------
Net pension cost $ 1,094 $-- $ 976 $ 1,359
======= === ======= =======
For the 28 Weeks Ended
--------------------------------------
September 9, 2006 September 10, 2005
----------------- ------------------
U.S. Canada U.S. Canada
------- ------ ------- ------
Service cost $ 2,845 $-- $ 3,230 $ 4,576
Interest cost 6,093 -- 6,401 6,519
Expected return on plan assets (6,650) -- (7,228) (8,369)
Amortization of unrecognized net prior
service (gain) cost (96) -- (158) 286
Amortization of unrecognized net loss 87 -- 31 900
Administrative expenses and other 195 -- -- 138
------- --- ------- -------
Net pension cost $ 2,474 $-- $ 2,276 $ 4,050
======= === ======= =======
CONTRIBUTIONS
We previously disclosed in our consolidated financial statements for the year
ended February 25, 2006, that we expected to contribute $5.2 million in cash to
our defined benefit plans in fiscal 2006. As of September 9, 2006, we
contributed approximately $2.3 million to our defined benefit plans. We plan to
contribute approximately $2.9 million to our plans in the remainder of fiscal
2006.
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 December 31 measurement date
for our postretirement benefits. The components of net postretirement benefits
(income) cost are as follows:
For the 12 Weeks Ended
--------------------------------------
September 9, 2006 September 10, 2005
----------------- ------------------
U.S. Canada U.S. Canada
------- ------ ------- -------
Service cost $ 87 $-- $ 78 $ 25
Interest cost 270 -- 276 91
Amortization of (gain) loss (51) -- (64) 40
Prior service gain (311) -- (311) (50)
----- --- ----- -----
Net postretirement benefits
(income) cost $ (5) $-- $ (21) $ 106
===== === ===== =====
28
For the 28 Weeks Ended
--------------------------------------
September 9, 2006 September 10, 2005
----------------- ------------------
U.S. Canada U.S. Canada
------- ------ ------- ------
Service cost $ 201 $-- $ 182 $ 75
Interest cost 632 -- 646 270
Amortization of (gain) loss (120) -- (150) 118
Prior service gain (725) -- (725) (148)
----- --- ----- -----
Net postretirement benefits
(income) cost $ (12) $-- $ (47) $ 315
===== === ===== =====
10. STOCK BASED COMPENSATION
During the 12 and 28 weeks ended September 9, 2006, compensation expense related
to share-based incentive plans was $2.5 million and $5.8 million, after tax,
respectively, compared to $2.7 million and $4.9 million, after tax, during the
12 and 28 weeks ended September 10, 2005, respectively. Included in share-based
compensation expense recorded during the 12 and 28 weeks ended September 9, 2006
was $0.2 million and $0.7 million, respectively, related to expensing of stock
options, $2.1 million and $4.3 million, respectively, relating to expensing of
restricted stock, and $0.2 million and $0.8 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 28 weeks ended September 10, 2005 was $0.5 million and $1.4
million, respectively, related to expensing of stock options, $1.0 million and
$2.2 million, respectively, relating to expensing of restricted stock, $1.1
million relating to the immediate vesting of certain stock options during the
second quarter ended September 10, 2005, and $0.08 million and $0.2 million,
respectively, relating to expensing of common stock to be granted to our Board
of Directors at the Annual Meeting of Stockholders. There was no effect on the
Consolidated Statement of Cash Flows from the adoption of SFAS 123R (revised
2004), "Share-Based Payment" ("SFAS 123R") as we adopted SFAS 123R using the
modified prospective application.
At September 9, 2006, we had two stock-based compensation plans. The general
terms of each plan, the method of estimating fair value for each plan and fiscal
2005 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 8,000,000 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. The units will vest 50% based
on achievement of a net profit in fiscal 2007 and 50% based on achievement
of a net profit in fiscal 2008. However, if our Company achieves
profitability in fiscal 2006, the shares will be earned and vesting will
commence in fiscal 2006 in one-third increments, based on achievement of
profitability in each year and the outlook for continued, sustainable
profitability.
29
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.
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. During the 12 weeks ended
September 9, 2006 and the 12 and 28 weeks ended September 10, 2005, our
Company did not grant any stock options under this plan. The following
assumptions were in place during the 28 weeks ended September 9, 2006:
28 weeks ended
Sept. 9, 2006
--------------
Expected life 7 years
Volatility 56%
Risk-free interest rate 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 28 weeks
ended September 9, 2006:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term (years) Value
--------- -------- ------------ ---------
Outstanding at February 25, 2006 1,534,385 $19.24
Adjustment for dividend* 371,995 --
Granted 86,430 27.71
Canceled or expired (206,672) 22.05
Exercised (314,131) 15.13
--------- ------
Outstanding at September 9, 2006 1,472,007 $15.36 4.9 $11,090
========= ====== === =======
Exercisable at:
September 9, 2006 1,183,912 $16.34 4.2 $ 7,760
=== =======
Nonvested at:
September 9, 2006 288,095 $11.33 8.0 $ 3,330
=== =======
The total intrinsic value of options exercised during the 28 weeks ended
September 9, 2006 was $4.3 million.
As of September 9, 2006, approximately $1.1 million, after tax, of total
unrecognized compensation expense related to unvested stock option awards
will be recognized over a weighted average period of 1.1 years.
The amount of cash received from the exercise of stock options was
approximately $4.8 million.
30
Performance Restricted Stock Units
During the 12 and 28 weeks ended September 9, 2006, our Company granted
6,702 and 393,162 shares of performance restricted stock units to selected
employees, respectively, for a total grant date fair value of $10.8
million. Approximately $18.9 million of unrecognized fair value
compensation expense relating to these performance restricted stock units
and those issued in the previous year are expected to be recognized through
fiscal 2009 based on estimates of attaining vesting criteria.
The following is a summary of the performance restricted stock units
activity during the 28 weeks ended September 9, 2006:
Weighted
Average
Exercise
Shares Price
--------- --------
Nonvested at February 25, 2006 1,285,000 $14.42
Adjustment for dividend* 339,369 --
Granted 393,162 27.59
Canceled or expired (47,746) 21.98
Exercised -- --
--------- ------
Nonvested at September 9, 2006 1,969,785 $14.38
========= ======
* As discussed in Note 3 - Special One-Time Dividend, our Company adjusted
the number and/or price of all unexercised stock options and nonvested
performance restricted stock units as of April 12, 2006, to ensure that an
individual's right to purchase stock at an aggregate value remained the
same both before and after the special one-time dividend payment. These
adjustments had no impact on stock compensation expense for the 28 weeks
ended September 9, 2006.
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 28 weeks ended September 9, 2006 and
September 10, 2005 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 U.S. net deferred tax asset and our historic cumulative
losses, we concluded that it was appropriate to record a valuation allowance in
an amount that would reduce our net U.S. deferred tax asset to zero. For the 12
and 28 weeks
31
ended September 9, 2006, the valuation allowance was decreased by $1.7 million
and $7.1 million, respectively, as compared to decreased by $260.5 million and
$257.0 million during the 12 and 28 weeks ended September 10, 2005,
respectively. To the extent that our U.S. 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 against net
deferred tax assets that are created by U.S. losses until such time as the
certainty of future tax benefits can be reasonably assured.
In October 2004, the U.S. government passed the "Homeland Investment Act" which
allows companies to repatriate cash balances from their controlled foreign
subsidiaries at a reduced tax rate. This is 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, we have recorded a tax provision of $98.1
million for the potential disallowance of the 85% dividend received deduction.
This amount was recorded in "(Provision for) benefit from income taxes" in our
Statements of Consolidated Operations for fiscal 2005 and in "Other non-current
liabilities" in our Consolidated Balance Sheet at February 25, 2006. During the
12 and 28 weeks ended September 9, 2006, this tax provision was reduced by $6.0
million and $17.3 million, respectively, as we continue to experience operating
losses which decreases the overall tax provision previously recorded during
fiscal 2005. This reduction was recorded in "Benefit from (provision for) income
taxes" in our Statements of Consolidated Operations for the 12 and 28 weeks
ended September 9, 2006. The $80.8 million is included in "Other non-current
liabilities" in our Consolidated Balance Sheet at September 9, 2006. This amount
is subject to further adjustment based upon several factors, including our
Company's operating results and the availability of foreign tax credits, which
were not estimable at September 9, 2006. Our Company intends to complete a
foreign tax credit analysis during fiscal 2006.
For the second quarter of fiscal 2006, our effective income tax rate of 91.6%
changed from the effective income tax rate of 21.3% in the second quarter of
fiscal 2005 as follows:
12 Weeks Ended
--------------------------------------------------
September 9, 2006 September 10, 2005
--------------------------------------------------
Effective Effective
Tax Benefit Tax Rate Tax Provision Tax Rate
----------- -------- ------------- ---------
United States $5,511 (91.6%) $(154,170) 20.5%
Canada -- -- (6,058) 0.8%
------ ----- --------- ----
$5,511 (91.6%) $(160,228) 21.3%
====== ===== ========= ====
The change in our effective tax rate was primarily due to (i.) the recognition
of tax benefits during the 12 weeks ended September 9, 2006 as we continue to
experience operating losses and these operating losses decrease the overall tax
provision previously recorded during the second quarter of fiscal 2005 in
connection with our Company's Domestic Reinvestment Plan as discussed above and
the sale of our Canadian operations, (ii) the decrease in our valuation
allowance as discussed above, (iii) the tax benefit from not providing deferred
taxes on the undistributed earnings of our investment in Metro, Inc., and (iv.)
the absence of a tax provision that was recorded for our Canadian operations
during the 12 weeks ended September 10, 2005 that was not recorded during the 12
weeks ended September 9, 2006 due to the sale of our Canadian operations during
the second quarter of fiscal 2005.
32
For the 28 weeks ended September 9, 2006, our effective income tax rate of 71.9%
changed from the effective income tax rate of 25.7% for the 28 weeks ended
September 10, 2005 as follows:
28 Weeks Ended
---------------------------------------------------
September 9, 2006 September 10, 2005
----------------------- -------------------------
Effective Effective
Tax Benefit Tax Rate Tax Provision Tax Rate
----------- --------- ------------- ---------
United States $15,170 (71.9%) $(155,625) 23.0%
Canada -- -- (18,539) 2.7%
------- ----- --------- ----
$15,170 (71.9%) $(174,164) 25.7%
======= ===== ========= ====
The change in our effective tax rate was primarily due to (i.) the recognition
of tax benefits during the 28 weeks ended September 9, 2006 as we continue to
experience operating losses and these operating losses decrease the overall tax
provision previously recorded during the second quarter of fiscal 2005 in
connection with our Company's Domestic Reinvestment Plan as discussed above and
the sale of our Canadian operations, (ii) the decrease in our valuation
allowance as discussed above, (iii) the tax benefit from not providing deferred
taxes on the undistributed earnings of our investment in Metro, Inc., and (iv.)
the absence of a tax provision that was recorded for our Canadian operations
during the 28 weeks ended September 10, 2005 that was not recorded during the 28
weeks ended September 9, 2006 due to the sale of our Canadian operations during
the second quarter of fiscal 2005.
At September 9, 2006 and February 25, 2006, we had a net current deferred tax
asset which is included in "Prepaid expenses and other current assets" on our
Consolidated Balance Sheet totaling $51.9 million and $60.0 million,
respectively, and a net non-current deferred tax liability which is included in
"Other non-current liabilities" on our Consolidated Balance Sheets totaling
$51.9 million and $60.0 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 the 12 and 28 weeks ended September 9, 2006, we operated in two
reportable segments: United States and our investment in Metro, Inc. During the
12 and 28 weeks ended September 10, 2005, we operated in three reportable
segments: United States, Canada, and our investment in Metro, Inc. Our United
States and Canadian segments are comprised of retail supermarkets. Our equity
investment represents our economic interest in Metro, Inc. and is required to be
reported as an operating segment in accordance with SFAS 131, "Disclosure about
Segments of an Enterprise and Related Information" as our investment is greater
than 10% of our Company's combined assets of all operating segments and we have
significant influence over substantive operating decisions through our
membership on Metro, Inc.'s Board of Directors and its committees and
information technology services agreement. The accounting policies for these
segments are the same as those described in the summary of significant
accounting policies included in our Fiscal 2005 Annual Report. We measure
segment performance based upon (loss) income from operations.
33
Interim information on segments is as follows:
12 Weeks Ended 28 Weeks Ended
---------------------------- ----------------------------
September 9, September 10, September 9, September 10,
2006 2005 2006 2005
------------ ------------- ------------ -------------
Sales
United States $1,572,250 $1,598,085 $3,699,145 $3,828,003
Canada * -- 570,164 -- 1,723,879
---------- ---------- ---------- ----------
Total Company $1,572,250 $2,168,249 $3,699,145 $5,551,882
========== ========== ========== ==========
Sales by category
Grocery (1) $1,048,176 $1,410,451 $2,487,058 $3,611,153
Meat (2) 314,606 449,490 729,101 1,145,777
Produce (3) 205,347 307,010 473,442 793,654
Other (4) 4,121 1,298 9,544 1,298
---------- ---------- ---------- ----------
Total Company $1,572,250 $2,168,249 $3,699,145 $5,551,882
========== ========== ========== ==========
(1) The grocery category includes grocery, frozen foods, dairy, general
merchandise/health and beauty aids, liquor, pharmacy and fuel.
(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.
Depreciation and amortization
United States $ 40,272 $ 45,846 $ 95,219 $ 106,826
Canada * -- 47 -- 10,942
-------- --------- -------- ---------
Total Company $ 40,272 $ 45,893 $ 95,219 $ 117,768
======== ========= ======== =========
(Loss) income from operations
United States $ (3,154) $(162,593) $ (8,207) $(240,430)
Canada * -- 17,527 -- 57,224
-------- --------- -------- ---------
Total Company $ (3,154) $(145,066) $ (8,207) $(183,206)
======== ========= ======== =========
(Loss) income from continuing
operations before income taxes
United States $(17,889) $ 736,944 $(40,921) $ 628,971
Canada* -- 15,430 -- 48,201
Equity investment in Metro, Inc. 11,870 -- 19,817 --
-------- --------- -------- ---------
Total Company $ (6,019) $ 752,374 $(21,104) $ 677,172
======== ========= ======== =========
Capital expenditures
United States $ 52,217 $ 22,742 $120,346 $ 62,376
Canada * -- 17,015 -- 47,201
-------- --------- -------- ---------
Total Company $ 52,217 $ 39,757 $120,346 $ 109,577
======== ========= ======== =========
September 9, February 25,
2006 2006
------------ -------------
Total assets
United States $1,812,741 $2,160,109
Equity investment in Metro, Inc. 367,426 338,756
---------- ----------
Total Company $2,180,167 $2,498,865
========== ==========
* We sold our Canadian operations during fiscal 2005; thus, we have included
the operating results of our Canadian subsidiary through the date of its
sale.
34
13. INDEBTEDNESS
During fiscal 2005, we entered into a new, cash collateralized, Letter of Credit
Agreement that enables us to issue letters of credit up to $200 million. Refer
to Note 5 - Cash, Cash Equivalents, Restricted Cash, and Marketable Securities
for further discussion of our Letter of Credit Agreement. We also 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.
At September 9, 2006 and February 25, 2006, there were $84.0 million and nil,
respectively, in outstanding borrowings under our Revolver.
Subsequent to the end of our second quarter ended September 9, 2006, the Company
transferred 6,000,000 of our Class A subordinate shares of Metro, Inc. from our
foreign subsidiary to the United States. These transferred shares will be used
as collateral for our new Letter of Credit Agreement that we entered into during
fiscal 2005 and will allow us to reduce the amount of restricted cash and/or
marketable securities we were required to maintain as collateral previously.
14. TENDER OFFER AND REPURCHASE OF 7.75% NOTES DUE 2007 AND 9.125% SENIOR NOTES
DUE 2011
During the second quarter of fiscal 2005, our Company commenced a cash tender
offer for all of the outstanding principal amount of our 7.75% Notes due April
15, 2007 and 9.125% Senior Notes due December 15, 2011. The tender offer expired
on September 7, 2005. On September 8, 2005, our Company purchased, pursuant to
the tender offer $166.7 million, of our $199 million 7.75% Notes due April 15,
2007 and $203.7 million of our $216.5 million 9.125% Senior Notes due December
15, 2011 using $370.4 million of the gross proceeds from the sale of our
Canadian operations. Our Company also paid $28.6 million in tender premiums and
other fees and expenses with our Company's gross proceeds from the sale of our
Canadian operations and wrote off approximately $3.9 million of unamortized debt
discount and issuance costs related to this tender offer.
In addition, due to the early extinguishment of a significant portion of the
7.75% Notes due April 15, 2007, we recognized $3.1 million of the deferred gain
that resulted from the termination of three interest rate swaps we entered into
during fiscal 2002 to effectively convert a portion of our 7.75% Notes due April
15, 2007 from fixed rate debt to floating rate debt. The portion of the deferred
gain that was recognized related to the underlying debt instrument that was
early extinguished. The remaining portion of the deferred gain will continue to
be amortized as an offset to interest expense over the life of the remaining
underlying debt instrument and is classified as "Long term debt" in our
Consolidated Balance Sheets.
Both the tender premiums and other fees and expenses as well as the recognition
of the deferred gain are included in "Store operating, general and
administrative expense" in our Statements of Consolidated Operations for the 12
and 28 weeks ended September 10, 2005.
35
15. HURRICANE KATRINA AND IMPACT ON U.S. BUSINESS
During the second quarter of fiscal 2005, Hurricane Katrina had a major effect
on certain portions of the Gulf Coast region and resulted in the closure of our
28 stores and warehouse facilities. As of September 9, 2006, 23 of these stores
were open and operating and the remaining 5 stores were closed in fiscal 2005.
We maintain insurance coverage for this type of loss which provides for
reimbursement from losses resulting from property damage, loss of product as
well as business interruption coverage. We have recovered and expect to recover
the remaining losses caused by Hurricane Katrina in excess of our estimated
insurance deductible of approximately $5.0 million, which was recorded in "Store
operating, general and administrative expense" in our Statements of Consolidated
Operations for the 12 and 28 weeks ended September 10, 2005.
16. HEDGE OF NET INVESTMENT IN FOREIGN OPERATIONS
From time to time, we may enter into 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.
During the first quarter of fiscal 2005, we entered into a six month currency
exchange forward contract totaling $900 million Canadian dollar notional value
to hedge our net investment in our Canadian foreign operations against adverse
movements in exchange rates. Our Company measures ineffectiveness based upon the
change in forward exchange rates.
In the second quarter of fiscal 2005 and upon completion of the sale of our
Canadian operations, this forward contract was terminated prior to its
expiration. Upon settlement, the effective portion of this net investment hedge
contract resulted in a loss, after tax, of approximately $12.8 million and $21.1
million during the 12 and 28 weeks ended September 10, 2005, respectively, and
was recognized as an offset to the gain recorded in connection with the sale of
our Canadian subsidiary. The gain was recorded in "Gain (loss) on sale of
Canadian operations" in our Statements of Consolidated Operations for the 12 and
28 weeks ended September 10, 2005.
In addition, the amount excluded from the measure of effectiveness on this net
investment hedge amounted to $12.5 million and $15.4 million, before income
taxes, and was recorded as "Store operating, general and administrative expense"
in our Statements of Consolidated Operations for the 12 and 28 weeks ended
September 10, 2005, respectively.
17. COMMITMENTS AND CONTINGENCIES
Antitrust Class Action Litigation
In connection with a settlement reached in the VISA/MasterCard antitrust class
action litigation, our Company is entitled to a portion of the settlement fund
that will be distributed to class members. Pursuant to our initial review of our
historical records as well as estimates provided by the Claims Administrator, we
recorded an estimated pretax recovery of $1.5 million as a credit to "Selling,
general and administrative expense" in our Statements of Consolidated Operations
during fiscal 2005.
36
During the second quarter of fiscal 2006, our Company received a cash payment of
$1.6 million for our portion of the settlement funds for this class action
litigation. During the remainder of fiscal 2006, we will continue to work with
the Claims Administrator to ensure that any additional monies owed to our
Company in connection with this litigation are received. This process may result
in additional recoveries being recorded in future periods.
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.
37
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:
o Basis of Presentation - a discussion of our Company's results during the 12
and 28 weeks ended September 9, 2006 and September 10, 2005.
o Overview - a general description of our business; the value drivers of our
business; measurements; opportunities; challenges and risks; and
initiatives.
o Outlook - a discussion of certain trends or business initiatives for the
remainder of fiscal 2006 that Management wishes to share with the reader to
assist in understanding the business.
o Review of Continuing Operations and Liquidity and Capital Resources -- a
discussion of results for the 12 weeks ended September 9, 2006 compared to
the 12 weeks ended September 10, 2005; results for the 28 weeks ended
September 9, 2006 compared to the 28 weeks ended September 10, 2005;
current and expected future liquidity; and the impact of various market
risks on our Company.
o Critical Accounting Estimates -- a discussion of significant estimates made
by Management.
o Impact of New Accounting Pronouncements - a discussion of authoritative
pronouncements that have been or will be adopted by our Company.
o Market Risk - a discussion of the impact of market changes on our
consolidated financial statements.
BASIS OF PRESENTATION
The accompanying consolidated financial statements of The Great Atlantic &
Pacific Tea Company, Inc. for the 12 and 28 weeks ended September 9, 2006 and
September 10, 2005 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 Fiscal 2005
Annual Report to Stockholders on Form 10-K. 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 9 U.S. states and the District of Columbia. Our
Company's business consists strictly of our retail operations, which totaled 403
stores as of September 9, 2006.
38
Our United States retail operations are organized in three regions: North
Region, operating A&P supermarkets in New York and Northern New Jersey, The Food
Emporium in Westchester County, N.Y, A&P/Super Foodmart stores in Connecticut,
and all Food Basics discount stores; Central Region, operating all Waldbaum's
supermarkets, The Food Emporium in Manhattan, and the Farmer Jack supermarkets
in Michigan; and South Region, operating Super Fresh supermarkets in Baltimore
and Philadelphia, A&P supermarkets in Central New Jersey and Sav-A-Center
supermarkets in the greater New Orleans market.
A&P's operating results continued to improve over the prior year's performance
in the second quarter of fiscal 2006. Overall, we remained on plan with respect
to operating, merchandising, store development and cost reduction strategies.
Despite competitors' responses to our merchandising and promotion improvements,
we again grew comparable store sales. Those gains combined with achievement of
targeted cost savings produced increases in operating income.
Alongside the fundamental retail improvements that remain in progress, our
Company continued converting suitable locations to our successful Fresh store
format. Each upgrade has produced significant overall sales increases, as well
as a profitable shift to greater fresh category distribution - further boosting
bottom line store performance.
We continued working towards the development of our discount Food Basics
operations, fine-tuning and re-launching several store locations in New Jersey.
This evolution of our discount presentation will ultimately give us powerful
concepts on both the fresh and discount sides of our business. Combined with our
upcoming gourmet store development at The Food Emporium in New York, this will
fulfill the three-tier marketing strategy that will largely be in place
throughout our Northeast and Mid-Atlantic operations within the next two years.
In Michigan, we remain committed to the turnaround of Farmer Jack and to the
marketing initiatives driving its improvement. Behind that strategy, we have
begun development of a targeted store format, providing the combination of fresh
and discount elements of greatest appeal to that market. Our Sav-A-Center
operation in New Orleans continues to perform well, having clearly led the
marketplace in restoring the bulk of operations to full-strength in the
aftermath of Hurricane Katrina.
Across the business, we continued the improvement of fundamentals, in
merchandising execution, promotional effectiveness, store operating best
practices and cost reduction. We continued to benefit significantly from our
logistics partnership with C&S Wholesale Grocers, Inc. with whom we are further
improving efficiency, service levels and in-stock performance to drive
profitable sales growth.
OUTLOOK
Our objective in the third quarter and the balance of fiscal 2006 is to remain
focused on the strategic elements that have driven our improvement thus far,
thereby remaining on track to achieve overall profitability in fiscal 2007 as
planned.
Accordingly, the execution of our marketing and retail development plans will
continue to be a high priority, as will the continued cost control disciplines
we have established. Key elements are:
39
o Move forward with our capital plan for the conversion of additional
locations to the Fresh format;
o Complete the fine-tuning of the discount Food Basics concept and proceed
with its rollout to appropriate locations;
o Launch our new generation Gourmet concept later this year under The Food
Emporium banner in New York City;
o Complete and implement our new Farmer Jack store concept in Michigan;
o Continue to improve our every-day grocery pricing and value image in all
markets, through more efficient buying and distribution, and innovative
marketing and promotion techniques.
Supporting those strategies is ongoing adherence to cost control, and reduction
wherever possible without compromising the growth of our business. We will
continue to seek and optimize additional means of improving labor productivity
in cooperation with our people and their labor unions, and by seeking all
reasonable opportunities to lower administrative, occupancy, and other operating
expenses.
In summary, we remain both encouraged by our ongoing improvement, and confident
that sound execution of our strategies will lead us to our profitability goal in
fiscal 2007.
Various factors could cause us to fail to achieve these goals. These include,
among others, the following:
o Actions of competitors could adversely affect our sales and future profits.
The grocery retailing industry continues to experience fierce competition
from other food retailers, super-centers, mass merchandisers, warehouse
clubs, drug stores, dollar stores and restaurants. 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 share of sales, thus reducing margins.
o Changes in the general business and economic conditions in our operating
regions, including the rate of inflation, population growth, the rising
prices of oil and gas, the nature and extent of continued consolidation in
the food industry and employment and job growth in the markets in which we
operate, may affect our ability to hire and train qualified employees to
operate our stores. This would negatively affect earnings and sales growth.
General economic changes may also affect the shopping habits and buying
patterns of our customers, which could affect sales and earnings. We have
assumed economic and competitive situations will not worsen in fiscal 2006
and 2007. However, we cannot fully foresee the effects of changes in
economic conditions, inflation, population growth, the rising prices of oil
and gas, customer shopping habits and the consolidation of the food
industry on our business.
o Our capital expenditures could differ from our estimate if we are
unsuccessful in acquiring suitable sites for new stores, or if development
and remodel costs vary from those budgeted.
40
o 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
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.
o 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.
o 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.
o 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.
o 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.
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.
41
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.
We sold our Canadian operations to Metro, Inc. at the close of business on
August 13, 2005. Therefore, comparative information relating to our Canadian
business that follows did not include any weeks during the 12 and 28 weeks ended
September 9, 2006, compared to 8 and 24 weeks during the 12 and 28 weeks ended
September 10, 2005, respectively.
12 WEEKS ENDED SEPTEMBER 9, 2006 COMPARED TO THE 12 WEEKS ENDED SEPTEMBER 10,
2005
OVERALL
Sales for the second quarter of fiscal 2006 were $1.6 billion compared to $2.2
billion for the second quarter of fiscal 2005; comparable store sales, which
includes stores that have been in operation for two full fiscal years and
replacement stores, increased 0.2%. Income from continuing operations decreased
from $592.2 million for the second quarter of fiscal 2005 to a loss from
continuing operations of $0.5 million for the second quarter of fiscal 2006,
primarily due to the absence of the gain on sale of our Canadian operations
recorded during the 12 weeks ended September 10, 2005. Net loss per share -
basic and diluted for the second quarter of fiscal 2006 was $0.01, compared to a
net income per share - basic and diluted of $14.64 and $14.40, respectively, for
the second quarter of fiscal 2005.
12 Weeks 12 Weeks
Ended Ended (Unfavorable) /
Sept. 9, 2006 Sept. 10, 2005 Favorable % Change
------------- -------------- --------------- --------
Sales $1,572.3 $2,168.2 $(595.9) (27.5%)
Increase (decrease) in comparable
store sales 0.2% (0.6%) NA NA
(Loss) income from continuing
operations (0.5) 592.2 (592.7) >100.0%
Loss from discontinued operations -- (0.2) 0.2 >100.0%
Net (loss) income (0.5) 592.0 (592.5) >100.0%
Net (loss) income per share - basic (0.01) 14.64 (14.65) >100.0%
Net (loss) income per share - diluted (0.01) 14.40 (14.41) >100.0%
SALES
Sales for the second quarter of fiscal 2006 of $1,572.3 million decreased $595.9
million or 27.5% from sales of $2,168.2 million for second quarter of fiscal
2005. The lower sales were due to a decrease in U.S. sales of $25.8 million and
a decrease in Canadian sales of $570.1 million. The following table presents
sales for each of our reportable operating segments for the second quarter of
fiscal 2006 and the second quarter of fiscal 2005:
42
12 Weeks Ended 12 Weeks Ended
Sept. 9, 2006 Sept. 10, 2005 Decrease % Change
-------------- -------------- -------- --------
United States $1,572.3 $1,598.1 $ (25.8) (1.6%)
Canada -- 570.1 (570.1) (100.0)
-------- -------- ------- ------
Total $1,572.3 $2,168.2 $(595.9) (27.5%)
======== ======== ======= ======
The following details the dollar impact of several items affecting the decrease
in sales by reportable operating segment from the second quarter of fiscal 2005
to the second quarter of fiscal 2006:
Impact of Impact of Comparable
New Closed Store
Stores Stores Sales Other Total
--------- --------- ---------- ------- -------
United States $5.4 $(38.8) $3.5 $ 4.1 $ (25.8)
Canada -- -- -- (570.1) (570.1)
---- ------ ---- ------- -------
Total $5.4 $(38.8) $3.5 $(566.0) $(595.9)
==== ====== ==== ======= =======
The decrease in U.S. sales was primarily attributable to the closing of 42
stores since the beginning of the second quarter of fiscal 2005, of which 3 were
closed in fiscal 2006, decreasing sales by $38.8 million. This decrease was
partially offset by the opening or re-opening of 3 new stores since the
beginning of the second quarter of fiscal 2005, of which 1 was opened or
re-opened in fiscal 2006, increasing sales by $5.4 million, the increase in
comparable store sales for the second quarter of fiscal 2006 of $3.5 million or
0.2% as compared with the second quarter of fiscal 2005, and the increase in
sales relating to an information technology services agreement with Metro, Inc.
of $4.1 million. Included in the 42 stores closed since the beginning of the
second quarter of fiscal 2005 were 35 stores closed as part of the asset
disposition initiative as discussed in Note 8 of our Consolidated Financial
Statements.
The decrease in Canadian sales of $570.1 million was due to the sale of our
Canadian operations during the second quarter of fiscal 2005 which resulted in
the inclusion of zero weeks of sales during the second quarter of fiscal 2006 as
compared to 8 weeks during the second quarter of fiscal 2005.
Average weekly sales per supermarket for the U.S. were approximately $336,700
for the second quarter of fiscal 2006 versus $324,800 for the corresponding
period of the prior year, an increase of 3.7% primarily due the impact of
closing smaller stores and positive comparable store sales.
GROSS MARGIN
The following table presents gross margin dollar results and gross margin as a
percentage of sales by reportable operating segment for the second quarter of
fiscal 2006 as compared to the second quarter of fiscal 2005. Gross margin as a
percentage of sales increased 218 basis points to 30.62% for the second quarter
of fiscal 2006 from 28.44% for the second quarter of fiscal 2005. This 218 basis
point increase was caused by the sale of our Canadian operations which had a
lower gross margin rate. We believe the impact on margin for changes in costs
and special reductions was not significant.
43
12 Weeks Ended 12 Weeks Ended
September 9, 2006 September 10, 2005
----------------------------- -----------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ -------------- ------------ --------------
United States $481.4 30.62% $480.2 30.05%
Canada -- -- 136.5 23.94
------ ----- ----- -----
Total $481.4 30.62% $616.7 28.44%
====== ===== ====== =====
The following table details the dollar impact of several items affecting the
gross margin dollar increase (decrease) from the second quarter of fiscal 2005
to the second quarter of fiscal 2006:
Gross Margin
Sales Volume Rate Other Total
------------ ------------ ------- -------
United States $(7.8) $9.0 $ -- $ 1.2
Canada -- -- (136.5) (136.5)
----- ---- ------- -------
Total $(7.8) $9.0 $(136.5) $(135.3)
===== ==== ======= =======
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
The following table presents store operating, general and administrative expense
("SG&A"), by reportable operating segment, in dollars and as a percentage of
sales for the second quarter of fiscal 2006 compared with the second quarter of
fiscal 2005. SG&A expense was $484.5 million or 30.82% for the second quarter of
fiscal 2006 as compared to $761.7 million or 35.13% for the second quarter of
fiscal 2005.
12 Weeks Ended 12 Weeks Ended
Sept. 9, 2006 Sept. 10, 2005
----------------------- -----------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------ -------------- ------ --------------
United States $484.5 30.82% $642.8 40.22%
Canada -- -- 118.9 20.85
------ ----- ------ -----
Total $484.5 30.82% $761.7 35.13%
====== ===== ====== =====
Included in SG&A in the U.S. for the second quarter of fiscal 2006 were certain
charges as follows:
o costs relating to the closing of our owned warehouses in Edison, New Jersey
and Bronx, New York of $0.6 million (4 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;
o costs relating to the consolidation of our operating offices in line with
our smaller operations in the U.S. of $0.3 million (2 basis points); and
o costs relating to a voluntary labor buyout program in the South Region of
$0.6 million (4 basis points).
Partially offset by:
o net real estate activity of $1.2 million (7 basis points) during the second
quarter of fiscal 2006; and
o reversal of vacancy related costs relating to the closures of stores in the
Midwest as discussed in Note 8 - Asset Disposition Initiatives of $2.2
million (14 basis points).
SG&A in the U.S. for the second quarter of fiscal 2005 also included certain
charges as follows:
44
o costs relating to the closing of our owned warehouses in Edison, New Jersey
and Bronx, New York of $17.7 million (111 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;
o costs relating to the closure of stores in the Midwest of $70.2 million
(439 basis points) as discussed in Note 8 - Asset Disposition Initiatives;
o costs relating to the cash tender offer completed during the second quarter
of fiscal 2005, as discussed in Note 14 - Tender Offer and Repurchase of
7.75% Notes Due 2007 and 9.125% Senior Notes Due 2011 of $29.5 million (184
basis points);
o costs relating to the long-lived assets impairment charge for one of our
U.S. asset groups of $9.6 million (60 basis points) as discussed in Note 6
- Valuation of Long-Lived Assets; and
o costs relating to the settlement of our net investment hedge as discussed
in Note 16 - Hedge of Net Investment in Foreign Operations of $12.5 million
(78 basis points).
Partially offset by:
o net real estate activity of $10.6 million (66 basis points) during the
second quarter of fiscal 2005.
Excluding the items listed above, SG&A within our core U.S. operations as a
percentage of sales decreased by 122 basis points during the second quarter of
fiscal 2006 as compared to the second quarter of fiscal 2005 primarily due to
the continued focus on discretionary spend, particularly within the
administrative departments.
The decrease in SG&A in Canada of $118.9 million was due to the sale of our
Canadian operations during the second quarter of fiscal 2005 which resulted in
the inclusion of zero weeks of costs during the second quarter of fiscal 2006 as
compared to 8 weeks during the first quarter of fiscal 2005.
During the 12 weeks ended September 9, 2006 and September 10, 2005, we recorded
impairment losses on long-lived assets of $1.3 million and $20.2 million,
respectively, as follows:
12 weeks ended 12 weeks ended
September 9, 2006 September 10, 2005
----------------- ----------------------
U.S. U.S. Canada Total
---- ----- ------ -----
Impairments due to closure or conversion in the normal
course of business $1.3 $ 1.0 $-- $ 1.0
Impairments due to unrecoverable assets -- 9.6 -- 9.6
Impairments related to our asset disposition initiatives (1) -- 9.6 -- 9.6
---- ----- --- -----
Total impairments $1.3 $20.2 $-- $20.2
==== ===== === =====
(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.
45
GAIN ON SALE OF CANADIAN OPERATIONS
We sold our Canadian operations to Metro, Inc. at the close of business on
August 13, 2005. As a result of this sale, we recorded a pretax gain of $919.1
million ($766.3 million after tax) during the 12 weeks ended September 10, 2005.
INTEREST EXPENSE
Interest expense of $16.9 million for the second quarter of fiscal 2006
decreased from the prior year amount of $25.3 million primarily due to (i.) the
repurchase of the majority of our 7.75% Notes due April 15, 2007 and our 9.125%
Senior Notes due December 15, 2011, during the second quarter of fiscal 2005
resulting in a reduction in interest expense of $7.2 million, and (ii.) the
absence of interest expense relating to our Canadian operations that was
recorded during the 12 weeks ended September 10, 2005 of $2.8 million but not
recorded during the 12 weeks ended September 9, 2006 as a result of its sale.
EQUITY IN EARNINGS OF METRO, INC.
We use the equity method of accounting to account for our investment in Metro,
Inc. on the basis that we have 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 ending September 9, 2006 and
September 10, 2005, we recorded $11.9 million and nil, respectively, in equity
earnings relating to our equity investment in Metro, Inc.
INCOME TAXES
The benefit from income taxes from continuing operations for the second quarter
of fiscal 2006 was $5.5 million compared to the provision for income taxes from
continuing operations for the second quarter of fiscal 2005 of $160.2 million (a
$154.1 million provision for our U.S. operations and a $6.1 million provision
for our Canadian operations). Consistent with prior year, we continue to record
a valuation allowance against our U.S. net deferred tax assets.
For the second quarter of fiscal 2006, our effective income tax rate of 91.6%
changed from the effective income tax rate of 21.3% in the second quarter of
fiscal 2005 as follows:
12 Weeks Ended
-------------------------------------------
September 9, 2006 September 10, 2005
------------------- ---------------------
Tax Effective Tax Effective
Benefit Tax Rate Provision Tax Rate
------- --------- --------- ---------
United States $5,511 (91.6%) $(154,170) 20.5%
Canada -- -- (6,058) 0.8%
------ ----- --------- ----
$5,511 (91.6%) $(160,228) 21.3%
====== ===== ========= ====
The change in our effective tax rate was primarily due to (i.) the recognition
of tax benefits during the 12 weeks ended September 9, 2006 as we continue to
experience operating losses and these operating losses decrease the overall tax
provision previously recorded during the second quarter of fiscal 2005 in
connection with our Company's Domestic Reinvestment Plan and the sale of our
Canadian operations, (ii) the decrease in our valuation allowance, (iii) the tax
benefit from not providing deferred taxes on the undistributed
46
earnings of our investment in Metro, Inc., and (iv.) the absence of a tax
provision that was recorded for our Canadian operations during the 12 weeks
ended September 10, 2005 that was not recorded during the 12 weeks ended
September 9, 2006 due to the sale of our Canadian operations during the second
quarter of fiscal 2005.
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, as well as our Eight O'Clock Coffee
business. These asset sales are now complete.
The loss from operations of discontinued businesses, net of tax, for the second
quarter of fiscal 2006 was nil as compared to a loss from operations of
discontinued businesses, net of tax, of $0.2 million for the second quarter of
fiscal 2005 which was primarily due to interest accretion on future occupancy
payments that were recorded at present value at the time of the original charge
and adjustments as a result of changes in estimates.
28 WEEKS ENDED SEPTEMBER 9, 2006 COMPARED TO THE 28 WEEKS ENDED SEPTEMBER 10,
2005
OVERALL
Sales for the 28 weeks ended September 9, 2006 were $3.7 billion compared to
$5.6 billion for the 28 weeks ended September 10, 2005; comparable store sales,
which includes stores that have been in operation for two full fiscal years and
replacement stores, increased 1.0%. Income from continuing operations decreased
from $503.0 million for the 28 weeks ended September 10, 2005 to a loss
from continuing operations of $5.9 million for the 28 weeks ended September 9,
2006, primarily due to the absence of the gain on sale of our Canadian
operations recorded during the 28 weeks ended September 10, 2005. Net loss per
share - basic and diluted for the 28 weeks ended September 9, 2006 was $0.16,
compared to a net income per share - basic and diluted of $12.64 and $12.47,
respectively, for the 28 weeks ended September 10, 2005.
28 Weeks 28 Weeks
Ended Ended
Sept. 9, 2006 Sept. 10, 2005 Unfavorable % Change
------------- -------------- ----------- --------
Sales $3,699.1 $5,551.9 $(1,852.8) (33.4%)
Increase (decrease) in comparable
store sales 1.0% (0.5%) NA NA
(Loss) income from continuing
operations (5.9) 503.0 (508.9) >100.0%
Loss from discontinued operations (0.7) (0.3) (0.4) >100.0%
Net (loss) income (6.6) 502.7 (509.3) >100.0%
Net (loss) income per share - basic (0.16) 12.64 (12.80) >100.0%
Net (loss) income per share - diluted (0.16) 12.47 (12.63) >100.0%
SALES
Sales for the 28 weeks ended September 9, 2006 of $3,699.1 million decreased
$1,852.8 million or 33.4% from sales of $5,551.9 million for 28 weeks ended
September 10, 2005. The lower sales were due to a decrease in U.S. sales of
$128.9 million and a decrease in Canadian sales of $1,723.9 million. The
following table presents sales for each of our reportable operating segments for
the 28 weeks ended September 9, 2006 and the 28 weeks ended September 10, 2005:
47
28 Weeks Ended 28 Weeks Ended
Sept. 9, 2006 Sept. 10, 2005 Decrease % Change
-------------- -------------- --------- --------
United States $3,699.1 $3,828.0 $ (128.9) (3.4%)
Canada -- 1,723.9 (1,723.9) (100.0)
-------- -------- --------- ------
Total $3,699.1 $5,551.9 $(1,852.8) (33.4%)
======== ======== ========= ======
The following details the dollar impact of several items affecting the decrease
in sales by reportable operating segment from the 28 weeks ended September 10,
2005 to the 28 weeks ended September 9, 2006:
Impact of Impact of Comparable
New Closed Store
Stores Stores Sales Other Total
--------- --------- ---------- --------- ---------
United States $16.7 $(190.8) $35.7 $ 9.5 $ (128.9)
Canada -- -- -- (1,723.9) (1,723.9)
----- ------- ----- --------- ---------
Total $16.7 $(190.8) $35.7 $(1,714.4) $(1,852.8)
===== ======= ===== ========= =========
The decrease in U.S. sales was primarily attributable to the closing of 52
stores since the beginning of fiscal 2005, of which 3 were closed in fiscal
2006, decreasing sales by $190.8 million. This decrease was partially offset by
the opening or re-opening of 3 new stores since the beginning of fiscal 2005, of
which 1 was opened or re-opened in fiscal 2006, increasing sales by $16.7
million, the increase in comparable store sales for the 28 weeks ended September
9, 2006 of $35.7 million or 1.0% as compared with the 28 weeks ended September
10, 2005, and the increase in sales relating to an information technology
services agreement with Metro, Inc. of $9.5 million. Included in the 52 stores
closed since the beginning of fiscal 2005 were 35 stores closed as part of the
asset disposition initiative as discussed in Note 8 of our Consolidated
Financial Statements.
The decrease in Canadian sales of $1,723.9 million was due to the sale of our
Canadian operations during the second quarter of fiscal 2005 which resulted in
the inclusion of zero weeks of sales for the 28 weeks ended September 9, 2006 as
compared to the inclusion of 24 weeks for the 28 weeks ended September 10, 2005.
Average weekly sales per supermarket for the U.S. were approximately $339,100
for the 28 weeks ended September 9, 2006 versus $323,600 for the corresponding
period of the prior year, an increase of 4.8% primarily due the impact of
closing smaller stores and positive comparable store sales.
GROSS MARGIN
The following table presents gross margin dollar results and gross margin as a
percentage of sales by reportable operating segment for the 28 weeks ended
September 9, 2006 as compared to the 28 weeks ended September 10, 2005. Gross
margin as a percentage of sales increased 226 basis points to 30.26% for the 28
weeks ended September 9, 2006 from 28.00% for the 28 weeks ended September 10,
2005. We believe the impact on margin for changes in costs and special
reductions was not significant.
48
28 Weeks Ended 28 Weeks Ended
September 9, 2006 September 10, 2005
----------------------------- -----------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ -------------- ------------ --------------
United States $1,119.5 30.26% $1,133.9 29.62%
Canada -- -- 420.7 24.40
-------- ----- -------- -----
Total $1,119.5 30.26% $1,554.6 28.00%
======== ===== ======== =====
The following table details the dollar impact of several items affecting the
gross margin dollar increase (decrease) from the 28 weeks ended September 10,
2005 to the 28 weeks ended September 9, 2006:
Sales Volume Gross Margin Rate Other Total
------------ ----------------- ------- --------
United States $(38.2) $23.8 $ -- $ (14.4)
Canada -- -- (420.7) (420.7)
------ ----- ------- -------
Total $(38.2) $23.8 $(420.7) $(435.1)
====== ===== ======= =======
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
The following table presents store operating, general and administrative expense
by reportable operating segment, in dollars and as a percentage of sales for the
28 weeks ended September 9, 2006 compared with the 28 weeks ended September 10,
2005. SG&A expense was $1,127.7 million or 30.49% for the 28 weeks ended
September 9, 2006 as compared to $1,737.8 million or 31.30% for the 28 weeks
ended September 10, 2005.
28 Weeks Ended 28 Weeks Ended
Sept. 9, 2006 Sept. 10, 2005
------------------------- -------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
-------- -------------- -------- --------------
United States $1,127.7 30.49% $1,374.3 35.90%
Canada -- -- 363.5 21.09
-------- ----- -------- -----
Total $1,127.7 30.49% $1,737.8 31.30%
======== ===== ======== =====
Included in SG&A in the U.S. for the 28 weeks ended September 9, 2006 were
certain charges as follows:
o costs relating to the closing of our owned warehouses in Edison, New Jersey
and Bronx, New York of $5.0 million (14 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;
o costs relating to closures of stores in the Midwest as discussed in Note 8
- Asset Disposition Initiatives of $3.0 million (8 basis points);
o costs relating to the consolidation of our operating offices in line with
our smaller operations in the U.S. of $3.6 million (10 basis points); and
o costs relating to a voluntary labor buyout program in the South Region of
$4.2 million (11 basis points).
Partially offset by:
49
o net real estate activity of $10.2 million (27 basis points) during the 28
weeks ended September 9, 2006.
SG&A in the U.S. for the 28 weeks ended September 10, 2005 also included certain
charges as follows:
o costs relating to the closing of our owned warehouses in Edison, New Jersey
and Bronx, New York of $64.7 million (169 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;
o costs relating to the closure of stores in the Midwest of $85.0 million
(222 basis points) as discussed in Note 8 - Asset Disposition Initiatives;
o costs relating to the cash tender offer completed during the 28 weeks ended
September 10, 2005, as discussed in Note 14 - Tender Offer and Repurchase
of 7.75% Notes Due 2007 and 9.125% Senior Notes Due 2011 of $29.5 million
(77 basis points);
o costs relating to the long-lived assets impairment charge for one of our
U.S. asset groups as discussed in Note 6 - Valuation of Long-Lived Assets
of $9.6 million (25 basis points); and
o costs relating to the settlement of our net investment hedge as discussed
in Note 16 - Hedge of Net Investment in Foreign Operations of $15.4 million
(40 basis points).
Partially offset by:
o net real estate activity of $26.0 million (68 basis points) during the 28
weeks ended September 10, 2005.
Excluding the items listed above, SG&A within our core U.S. operations as a
percentage of sales decreased by 91 basis points during the 28 weeks ended
September 9, 2006 as compared to the 28 weeks ended September 10, 2005 primarily
due to the continued focus on discretionary spend, particularly within the
administrative departments.
The decrease in SG&A in Canada of $363.5 million was due to the sale of our
Canadian operations during the second quarter of fiscal 2005 which resulted in
the inclusion of zero weeks of costs during the 28 weeks ended September 9, 2006
as compared to 24 weeks during the 28 weeks ended September 10, 2005.
During the 28 weeks ended September 9, 2006 and September 10, 2005, we recorded
impairment losses on long-lived assets of $3.6 million and $26.6 million,
respectively, as follows:
28 weeks ended 28 weeks ended
September 9, 2006 September 10, 2005
----------------- ----------------------
U.S. U.S. Canada Total
----------------- ----- ------ -----
Impairments due to closure or conversion in the
normal course of business $ 2.5 $ 1.0 $0.5 $ 1.5
Impairments due to unrecoverable assets -- 9.6 -- 9.6
Impairments related to our asset disposition initiatives (1) 1.1 15.5 -- 15.5
----- ----- ---- -----
Total impairments $ 3.6 $26.1 $0.5 $26.6
===== ===== ==== =====
(1) Refer to Note 8 - Asset Disposition Initiatives
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
50
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 SALE OF CANADIAN OPERATIONS
We sold our Canadian operations to Metro, Inc. at the close of business on
August 13, 2005. As a result of this sale, we recorded a pretax gain of $918.6
million ($765.8 million after tax) during the 28 weeks ended September 10, 2005.
INTEREST EXPENSE
Interest expense of $39.1 million for the 28 weeks ended September 9, 2006
decreased from the prior year amount of $61.4 million due primarily to (i.) the
repurchase of the majority of our 7.75% Notes due April 15, 2007 and our 9.125%
Senior Notes due December 15, 2011, during the second quarter of fiscal 2005
resulting in a reduction in interest expense of $17.2 million, and (ii.) the
absence of interest expense relating to our Canadian operations that was
recorded during the 28 weeks ended September 10, 2005 of $8.4 million but not
recorded during the 28 weeks ended September 9, 2006 as a result of its sale.
EQUITY IN EARNINGS OF METRO, INC.
We use the equity method of accounting to account for our investment in Metro,
Inc. on the basis that we have 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 28 weeks ending September 9, 2006 and
September 10, 2005, we recorded $19.8 million and nil, respectively, in equity
earnings relating to our equity investment in Metro, Inc.
INCOME TAXES
The benefit from income taxes from continuing operations for the 28 weeks ended
September 9, 2006 was $15.2 million compared to the provision for income taxes
from continuing operations for the 28 weeks ended September 10, 2005 of $174.2
million (a $155.6 million provision for our U.S. operations and an $18.6 million
provision for our Canadian operations). Consistent with prior year, we continue
to record a valuation allowance against our U.S. net deferred tax assets.
For the 28 weeks ended September 9, 2006, our effective income tax rate of 71.9%
changed from the effective income tax rate of 25.7% for the 28 weeks ended
September 10, 2005 as follows:
28 Weeks Ended
--------------------------------------------------
September 9, 2006 September 10, 2005
---------------------- -------------------------
Effective Effective
Tax Benefit Tax Rate Tax Provision Tax Rate
----------- --------- ------------- ---------
United States $15,170 (71.9%) $(155,625) 23.0%
Canada -- -- (18,539) 2.7%
------- ----- --------- ----
$15,170 (71.9%) $(174,164) 25.7%
======= ===== ========= ====
The change in our effective tax rate was primarily due to (i.) the recognition
of tax benefits during the 28 weeks ended September 9, 2006 as we continue to
experience operating losses and these operating losses
51
decrease the overall tax provision previously recorded during the second quarter
of fiscal 2005 in connection with our Company's Domestic Reinvestment Plan and
the sale of our Canadian operations, (ii) the decrease in our valuation
allowance, (iii) the tax benefit from not providing deferred taxes on the
undistributed earnings of our investment in Metro, Inc., and (iv.) the absence
of a tax provision that was recorded for our Canadian operations during the 28
weeks ended September 10, 2005 that was not recorded during the 28 weeks ended
September 9, 2006 due to the sale of our Canadian operations during the second
quarter of fiscal 2005.
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, as well as our Eight O'Clock Coffee
business. These asset sales are now complete.
The loss from operations of discontinued businesses, net of tax, for the 28
weeks ended September 9, 2006 was $0.7 million as compared to a loss from
operations of discontinued businesses, net of tax, of $0.3 million for the 28
weeks ended September 10, 2005 primarily due to changes in our estimation of
such future costs.
52
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table presents excerpts from our Consolidated Statement of Cash
Flows:
28 Weeks Ended
------------------------------
Sept. 9, 2006 Sept. 10, 2005
------------- --------------
Net cash provided by (used in) operating activities $ 16,866 $ (59,881)
--------- ---------
Net cash provided by investing activities $ 50,298 $ 568,134
--------- ---------
Net cash used in financing activities $(213,648) $(403,231)
--------- ---------
Net cash flow provided by operating activities of $16.9 million for the 28 weeks
ended September 9, 2006 primarily reflected our net loss of $6.6 million,
adjusted for non-cash charges for (i.) depreciation and amortization of $95.2
million, (ii.) our asset disposition initiatives of $4.9 million, partially
offset by (iii.) gains on the disposal of owned property of $10.8 million, (iv.)
income tax benefit relating to the sale of our Canadian operations of $17.3
million, and (v.) our equity in earnings of Metro, Inc. of $19.8 million, and a
decrease in accounts receivables of $69.4 million partially offset by a decrease
in accounts payable of $18.5 million, a decrease in accrued salaries, wages and
benefits of $15.3 million, a decrease in other accruals of $49.8 million
primarily due to timing and a decrease in non-current liabilities of $19.4
million due mainly to closed store accruals. Refer to Working Capital below for
discussion of changes in working capital items. Net cash flow used in operating
activities of $59.9 million for the 28 weeks ended September 10, 2005 primarily
reflected our net income of $502.7 million, adjusted for non-cash charges for
(i.) depreciation and amortization of $117.8 million, (ii.) our asset
disposition initiatives of $145.7 million, and (iii.) non-current income taxes
of $137.2 million, partially offset by (iv.) the non-cash gain on sale of
Canadian operations of $918.6 million, a decrease in inventories of $28.7
million and an increase in other accruals of $52.7 million primarily due to
timing partially offset by a decrease in accounts payable of $74.4 million and a
decrease in other non-current liabilities of $55.6 million primarily due to the
sale of our Canadian operations.
Net cash flow provided by investing activities of $50.3 million for the 28 weeks
ended September 9, 2006 primarily reflected proceeds received from the sale of
certain of our assets of $19.8 million, a decrease in restricted cash of $69.0
million, net proceeds from marketable securities of $82.2 million partially
offset by property expenditures totaling $120.3 million, which included 1 new
supermarket, 12 major remodels and 31 minor remodels. For the remainder of
fiscal 2006, we have planned capital expenditures of approximately $90 million,
which relate primarily to opening up to 3 new supermarkets under the Fresh
format, enlarging or remodeling up to 16 supermarkets to the new Fresh format,
opening 1 new store to the new Food Basics(R) format, converting up to 3
stores to the new Food Basics(R) format, and converting 1 supermarket to the new
Gourmet format. We currently expect to close up to 2 stores during the remainder
of fiscal 2006. Net cash flow provided by investing activities of $568.1 million
for the 28 weeks ended September 10, 2005 primarily reflected proceeds from the
sale of our Canadian operations of $960.7 million, proceeds received from the
sale of certain of our assets of $53.9 million partially offset by property
expenditures totaling $109.6 million, which included 2 new supermarkets and 30
major remodels, payments for derivatives of $15.4 million, disposal related
expenditures for sale of Canadian operations of $46.5 million, and the net
purchases of marketable securities of $275.0 million.
Net cash flow used in financing activities of $213.6 million for the 28 weeks
ended September 9, 2006 primarily reflected principal payments on long term
borrowings of $540.9 million, principal payments on
53
capital leases of $2.9 million, and dividends paid of $299.1 million partially
offset by proceeds from long term borrowings of $624.9 million and proceeds from
the exercise of stock options of $4.8 million. Net cash flow used in financing
activities of $403.2 million for the 28 weeks ended September 10, 2005 primarily
reflected principal payments on long term borrowings of $413.5 million and
principal payments on capital leases of $8.0 million partially offset by
proceeds from the exercise of stock options of $21.2 million.
On April 25, 2006, our Company paid a special one-time dividend to our
shareholders of record on April 17, 2006 equal to $7.25 per share. This dividend
payout totaling $299.1 million was considered a return of capital to our
shareholders and accordingly was recorded as a reduction of "Additional paid in
capital" in our Consolidated Balance Sheets at September 9, 2006. The
transaction was funded primarily by cash available on the balance sheet
resulting from the strategic restructuring of the Company during fiscal 2005.
We believe that our present cash resources, including invested cash on hand as
well as our marketable securities, available borrowings from our Revolver and
other sources, are sufficient to meet our needs. 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 Plan, we anticipate that we would be able to liquidate our
investment in Metro, Inc. and or modify the operating plan in order to ensure
that we have appropriate resources.
WORKING CAPITAL
We had working capital of $286.4 million at September 9, 2006 compared to
working capital of $599.7 million at February 25, 2006. We had cash and cash
equivalents aggregating $83.3 million at September 9, 2006 compared to $229.6
million at February 25, 2006. The decrease in working capital was attributable
primarily to the following:
o A decrease in cash and cash equivalents as detailed in the Statements of
Consolidated Cash Flows;
o A decrease in restricted cash and marketable securities due to the payment
of a one-time special dividend as discussed in Note 3 - Special One-Time
Dividend;
o A decrease in accounts receivable due to the timing and collection of
receipts; and
o An increase in the current portion of our long-term debt primarily due to
our 7.75% Notes becoming due on April 15, 2007.
Partially offset by the following:
o A decrease in accounts payable due to timing of payments;
o A decrease in accrued salaries, wages and benefits due to timing of
payments; and
o A decrease in other accruals due to timing.
REVOLVING CREDIT AGREEMENT
During fiscal 2005, we entered into a new, cash collateralized, Letter of Credit
Agreement that enables us to issue letters of credit up to $200 million. We also
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
54
commitments to $250 million. 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
September 9, 2006, there were no letters of credit outstanding under this
agreement; however, there were $84.0 million in outstanding borrowings under the
Revolver. As of September 9, 2006, after reducing availability for borrowing
base requirements, we had $162.6 million available under the Revolver. Combined
with cash we held in short-term investments and restricted marketable securities
of $90.0 million, we had total cash availability of $252.6 million at September
9, 2006.
Under the Revolver, we are permitted to pay cumulative cash dividends on common
shares as well as make bond repurchases which we may do from time to time in the
future.
Subsequent to the end of our second quarter ended September 9, 2006, the Company
transferred 6,000,000 of our Class A subordinate shares of Metro, Inc. from our
foreign subsidiary to the United States. These transferred shares will be used
as collateral for our new Letter of Credit Agreement that we entered into during
fiscal 2005 and will allow us to reduce the amount of restricted cash and/or
marketable securities we were required to maintain as collateral previously.
PUBLIC DEBT OBLIGATIONS
Outstanding notes totaling $244.7 million at September 9, 2006 consisted of
$31.9 million of 7.75% Notes due April 15, 2007, $12.8 million of 9.125% Senior
Notes due December 15, 2011 and $200 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% and 7.75% Notes. The 7.75% Notes are not redeemable prior to their
maturity. The 9.375% notes are now callable at par ($25 per bond) and the 9.125%
Notes may be called at a premium to par after December 15, 2006. 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 7.75% Notes and 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 2005, we repurchased in the open market $14.5
million of our 7.75% Notes due April 15, 2007. The cost of this open market
repurchase resulted in a pretax loss due to the early extinguishment of debt of
$0.5 million. In accordance with SFAS No. 145, "Rescission of FASB Statements 4,
44 and 64, Amendment of FASB 13, and Technical Corrections" ("SFAS 145"), this
loss has been classified within loss from operations.
During the second quarter of fiscal 2005, we repurchased in the open market
$166.7 million of our 7.75% Notes due April 15, 2007 and $203.7 million of our
9.125 Senior Notes due December 15, 2011 through a cash tender offer. The cost
of this open market repurchase resulted in a pretax loss due to the early
55
extinguishment of debt of $29.4 million. In accordance with SFAS No. 145, this
loss has been classified within loss from operations.
There were no similar repurchases in the first or second quarters of fiscal
2006.
OTHER
We currently have active Registration Statements dated January 23, 1998 and June
23, 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.
Although our Company paid a special one-time dividend to our shareholders of
record on April 17, 2006 equal to $7.25 per share, our Company's practice is to
not pay dividends. As such, we have not made dividend payments in the previous
three years and do not intend to pay dividends in the normal course of business
in fiscal 2006. However, our Company is permitted under the terms of our
Revolver to pay cash dividends on common shares.
We are the guarantor of a loan of $1.7 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 to become
unable to continue making payments under the Assigned Leases, we could be
required to assume the lease obligation. As of September 9, 2006, 117 Assigned
Leases remain in place. Assuming that each respective assignee became unable to
continue 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 $299.4 million, which could be partially or
totally offset by reassigning or subletting such leases.
Our existing senior debt rating was Caa1 with negative outlook with Moody's
Investors Service ("Moody's") and B- with stable outlook with Standard & Poor's
Ratings Group ("S&P") as of September 9, 2006. Our liquidity rating was SGL3
with Moody's as of September 9, 2006. Our recovery rating was 1 with S&P as of
September 9, 2006 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.
56
Self-Insurance Reserves
Our Consolidated Balance Sheets include liabilities with respect to self-insured
workers' compensation and general liability claims. We estimate the required
liability of such 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 and other data. 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. Such review is 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.
We also 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 28 weeks ended September 9, 2006, we recorded U.S.
impairment losses on long-lived assets as follows:
12 weeks ended 28 weeks ended
September 9, 2006 September 9, 2006
----------------- -----------------
Impairments due to closure or conversion in the
normal course of business $1.3 $2.5
Impairments due to unrecoverable assets -- --
Impairments related to our asset disposition initiatives (1) -- 1.1
---- ----
Total impairments $1.3 $3.6
==== ====
(1) Refer to Note 8 - Asset Disposition Initiatives
All of these amounts are included in SG&A in our Statements of Consolidated
Operations. 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. While these factors have been
relatively stable in recent years, variation in these factors could cause
changes to our estimates. As of September 9, 2006, we had recorded liabilities
for estimated probable obligations of $176 million. Of this amount, $19 million
relates to stores closed in the normal course of business, $147 million relates
to stores
57
and warehouses closed as part of the asset disposition initiatives (see Note 8
of our Consolidated Financial Statements), and $10 million relates to stores
closed as part of our exit of the northern New England and Kohl's businesses
(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.
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 U.S. 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 our
Company experiences improvement in our U.S. operations.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In October 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position FAS 13-1 ("FSP FAS 13-1"), which requires companies to expense
rental costs associated with ground or building operating leases that are
incurred during a construction period. As a result, companies that are currently
capitalizing these rental costs are required to expense them beginning in its
first reporting period beginning after December 15, 2005. FSP FAS 13-1 is
effective for our Company as of the first quarter of fiscal 2006. We evaluated
the provisions of FSP FAS 13-1 and have adopted the guidance. This adoption did
not have a material impact on our Company's financial position or results of
operations.
In July 2006, the 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. This
Interpretation provides that the tax effects from an uncertain tax position can
be recognized in our financial statements, only if the position is more likely
than not of being sustained on audit, based on the technical merits of the
position. The provisions of FIN 48 are effective as of the beginning of fiscal
2007, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. We are currently evaluating the
impact of adopting FIN 48 on our financial statements.
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
58
are effective for fiscal years beginning after November 15, 2007. Our Company is
currently evaluating the impact, if any, of the provisions of SFAS 157.
In September 2006, the FASB issued SFAS 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") and is effective for our fiscal year
ended February 24, 2007. This standard requires companies to recognize, on a
prospective basis, the funded status of their defined benefit pension and other
postretirement benefit plans as a net liability or asset on their balance
sheets. We are currently evaluating the impact of adopting this standard on our
financial statements.
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
our $330.5 million in total indebtedness as of September 9, 2006 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 28 weeks ended September 9, 2006, a presumed 1%
change in the variable floating rate would have impacted interest expense by
$0.2 million and $0.3 million, respectively. During the 12 and 28 weeks ended
September 10, 2005, a presumed 1% change in variable floating rate would not
have impacted interest expense as there were no borrowings on our committed bank
lines of credit.
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 $36.7 million at
September 9, 2006. During the 12 and 28 weeks ended September 10, 2005, a change
in the Canadian currency of 10% would have resulted in a fluctuation in net
income of $0.9 million and $3.0 million, respectively.
During the first quarter of fiscal 2005, we entered into a six month currency
exchange forward contract totaling $900 million Canadian dollar notional value
to hedge our net investment in our Canadian foreign operation against adverse
movements in exchange rates. In the second quarter of fiscal 2005 and upon
completion of the sale of our Canadian operations as discussed in Note 16 -
Hedge of Net Investment in Foreign Operations, this forward contract was
terminated prior to its expiration.
59
ITEM 4 - CONTROLS AND PROCEDURES
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 end of the period covered by this report.
There have been no changes during our Company's fiscal quarter ended September
9, 2006 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.
60
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 1A - RISK FACTORS
Set forth below is a summary of the material risks to an investment in our
securities.
o Actions of competitors could adversely affect our sales and future profits.
The grocery retailing industry continues to experience fierce competition
from other food retailers, super-centers, mass merchandisers, warehouse
clubs, drug stores, dollar stores and restaurants. 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 share of sales, thus reducing margins.
o Changes in the general business and economic conditions in our operating
regions, including the rate of inflation, population growth, the rising
prices of oil and gas, the nature and extent of continued consolidation in
the food industry and employment and job growth in the markets in which we
operate, may affect our ability to hire and train qualified employees to
operate our stores. This would negatively affect earnings and sales growth.
General economic changes may also affect the shopping habits and buying
patterns of our customers, which could affect sales and earnings. We have
assumed economic and competitive situations will not worsen in fiscal 2006
and 2007. However, we cannot fully foresee the effects of changes in
economic conditions, inflation, population growth, the rising prices of oil
and gas, customer shopping habits and the consolidation of the food
industry on our business.
o Our capital expenditures could differ from our estimate if we are
unsuccessful in acquiring suitable sites for new stores, or if development
and remodel costs vary from those budgeted.
o 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
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.
o 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
61
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.
o 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.
o 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.
o 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.
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 annual meeting of shareholders, held July 13, 2006, there were 38,737,371
shares or 93.71% of the 41,337,733 shares outstanding and entitled to vote
represented either in person or by proxy.
The seven (7) directors nominated to serve on the Board for a one-year term were
all elected, with each receiving an affirmative vote of at least 81.53% of the
shares present.
Of the total shares cast, 69.81% voted to approve an amendment to the 2004
Non-Employee Director Compensation Plan, and 92.8% voted to approve an amendment
to the 1998 Long Term Incentive and Share Award Plan.
62
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)
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)
63
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 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 (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)
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 (incorporated herein by reference to Exhibit 10 to Form
10-Q filed on January 16, 2001) ("Costantini Agreement")
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)
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
(incorporated herein by reference to Exhibit 10.26 to Form 10-Q
filed on October 22, 2002) ("Jueptner Agreement")
64
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 (incorporated herein by reference to
Exhibit 10.13 to Form 10-K filed on July 5, 2002) ("Metzger
Agreement")
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 28th day of
October, 2002, by and between our Company and Brian Piwek, and
Offer Letter dated the 23rd day of October, 2002 (incorporated
herein by reference to Exhibit 10.14 to Form 10-Q filed on January
10, 2003) ("Piwek Agreement")
10.16 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)
10.17 Employment Agreement, made and entered into as of the 4th 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)
10.18 Employment Agreement, made and entered into as of the 12th 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)
10.19 Employment Agreement, made and entered into as of the 2nd 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)
10.20 Employment Agreement, made and entered into as of the 2nd 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)
65
10.21 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)
10.22 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)
10.23 1994 Stock Option Plan (incorporated herein by reference to
Exhibit 10(e) to Form 10-K filed on May 24, 1995)
10.24 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)
10.25 Form of Stock Option Grant (incorporated herein by reference to
Exhibit 10.20 to Form 10-K filed on May 10, 2005)
10.26 Description of 2005 Turnaround Incentive Compensation Program
(incorporated herein by reference to Exhibit 10.21 to Form 10-K
filed on May 10, 2005)
10.27 Form of Restricted Share Unit Award Agreement (incorporated herein
by reference to Exhibit 10.22 to Form 10-K filed on May 10, 2005)
10.28 Description of 2006 Long Term Incentive Plan (incorporated herein
by reference to Exhibit 10.28 to Form 10-Q filed on July 21, 2006)
10.29 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)
10.30 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)
10.31 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)
10.32 Description of Management Incentive Plan (incorporated herein by
reference to Exhibit 10.30 to Form 10-K filed on May 9, 2006)
10.33 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 filed on October 18, 2005)
66
10.34 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 filed on October 18, 2005)
10.35 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)
10.36 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)
10.37 Letter of Credit Agreement, dated as of October 14, 2005 between
the Company and Bank of America, N.A., as Issuing Bank,
(incorporated herein by reference to Exhibit 10.42 to Form 10-Q
filed on October 18, 2005)
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 to Form 10-K filed
on May 9, 2006)
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
* Filed with this 10-Q
67
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: October 17, 2006 By: /s/ Melissa E. Sungela
-----------------------------------------------
Melissa E. Sungela, Vice President,
Corporate Controller (Chief Accounting Officer)
68
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: October 17, 2006
- -------------------------------------
Eric Claus
President and
Chief Executive Officer
69
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: October 17, 2006
- -------------------------------------
Brenda M. Galgano
Senior Vice President,
Chief Financial Officer
70
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
September 9, 2006 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: October 17, 2006 /s/ Eric Claus
--------------------------------
Eric Claus
President
and
Chief Executive Officer
Dated: October 17, 2006 /s/ Brenda M. Galgano
--------------------------------
Brenda M. Galgano
Senior Vice President,
Chief Financial Officer
71