UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial
information gives effect to the merger of A&P and Pathmark completed on December
3, 2007. The merger transaction will be accounted for using the purchase method
of accounting, in accordance with accounting principles generally accepted in
the United States, with A&P as the "acquiror" and Pathmark as the acquired
company.
These pro forma financial statements and adjustments are based on
preliminary estimates and assumptions made by management and have been made
solely for purposes of developing these pro forma financial statements for
illustrative purposes necessary to comply with the requirements of the SEC.
These pro forma financial statements are not necessarily indicative of the
results of operations that would have been achieved had the merger transaction
actually taken place at the dates indicated and do not purport to be indicative
of future financial position or operating results. The transaction was completed
on December 3, 2007 and had been subject to regulatory approval which was
recently received and accordingly access to information required to prepare the
pro forma financial statements was limited prior to consummation of the merger.
The actual results of the transaction reported by the combined company in
periods following the merger may differ from that reflected in these pro forma
financial statements depending on the actual amount of assets acquired after
required regulatory disposals and the final fair values assigned to amortizable
assets and liabilities.
You should read the pro forma financial information in conjunction with
A&P's and Pathmark's audited historical consolidated financial statements and
accompanying footnotes in A&P's current Report on Form 8-K, dated October 24,
2007, which revises A&P's Form 10-K for the fiscal year ended February 24, 2007
and Pathmark's Annual Report on Form 10-K for fiscal year ended February 3, 2007
and the Quarterly Reports on Form 10-Q for the fiscal quarters ended September
8, 2007 for A&P and August 4, 2007 for Pathmark.
During the first half of fiscal year 2007, A&P classified its assets in
the Midwest and the Greater New Orleans area as "Assets Held for Sale" on its
Form l0-Q Consolidated Balance Sheet pursuant to the requirements of SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 requires that once properties are identified as held for sale,
they are no long depreciated, valued on an asset-by asset basis at the lower of
carrying amount or fair value less costs to sell, and reclassified as a current
asset to "Assets held for sale" on A&P's Consolidated Balance Sheet. As of
September 8, 2007, sale transactions for a majority of the Midwest locations
have been completed, with final negotiations pending on one store location. In
addition, in accordance with SFAS 144, the criteria necessary to classify the
operations in both the Greater New Orleans area and the Midwest as discontinued
have been satisfied and as such, have been reclassified in A&P's Consolidated
Statements of Operations for the 28 weeks ended September 8, 2007 and September
9, 2006. The disposition of the stores in the Greater New Orleans area were
completed during the second half of fiscal 2007. The pro forma balance sheet has
not been adjusted to reflect the impact of the disposition of the final store
location in the Midwest and the stores in the Greater New Orleans area as
proceeds approximated net book value and any adjustments are considered
immaterial.
The pro forma financial statements and adjustments reflect that the
acquisition of Pathmark was financed through cash, issuance of stock, an asset
backed lending facility and a bridge loan. The Company intends to refinance the
bridge loan subsequent to the acquisition; however, there can be no assurance
that this will occur.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of September 8, 2007
(dollars in millions, except share and per share amounts)
Acquisition
Acquisition Date
Historical Historical Pro Forma Pro Forma
A&P Pathmark Adjustments Note Combined
---------- ---------- ----------- ---- -----------
ASSETS
Current assets:
Cash and cash equivalents 76.2 33.2 109.4
Restricted cash 193.9 (190.0) (4) 3.9
Accounts receivable, net 84.1 21.0 105.1
Inventories 314.2 187.4 7.5 (3) 509.1
Prepaid expenses and other
current assets 85.5 92.5 17.9 (8) 195.9
Assets held for sale 73.1 73.1
Total current assets 827.0 334.1 (164.6) 996.5
Non-current assets:
Property -- net 777.0 520.7 538.9 (3) 1,836.6
Investments in Metro Inc. 391.4 (391.4) (6) 0.0
Other assets 171.2 126.0 55.0 (5) 289.0
(6.6) (3)
(119.6) (8)
63.0 (3)
Goodwill 144.7 (144.7) (3) 563.8
563.8 (3)
---------- ------- -------- --------
Total assets 2,166.6 1,125.5 393.8 3,685.9
========== ======= ======== =======
The accompanying notes are an integral part of the Unaudited Pro Forma Condensed
Combined Financial Statements.
Acquisition
Acquisition Date
Historical Historical Pro Forma Pro Forma
A&P Pathmark Adjustments Note Combined
---------- ---------- ----------- ---- -----------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 0.1 39.4 (39.4) (4) 0.1
Current portion of obligations under
capital leases 1.4 10.7 12.1
Accounts payable 164.5 84.3 248.8
Accrued and other liabilities 318.4 143.5 461.9
Total current liabilities 484.4 277.9 (39.4) 722.9
Non-current liabilities:
Long-term debt 221.0 422.7 39.4 (4) 784.2
(462.1) (4)
(6.8) (4)
200.0 (4)
370.0 (4)
Long-term obligations under capital
leases 28.7 154.1 182.8
Long-term real estate liabilities 304.5 304.5
Common stock warrants 177.0 (4) 177.0
Other non-current liabilities 677.1 168.2 16.0 (7) 882.3
21.0 (8)
-------- ------- ------ -------
Total liabilities 1,715.7 1,022.9 315.1 3,053.7
Stockholders' equity:
Common stock 42.0 0.5 (0.5) (3) 48.8
6.8 (4)
Common stock warrants 69.7 (69.7) (3) 1.1
1.1 (4)
Additional paid-in capital 225.6 761.7 (761.7) (3) 447.6
210.8 (4)
11.2 (4)
Additional other comprehensive income 162.1 (39.6) 39.6 (3) 17.0
(145.1) (6)
Accumulated earnings (deficit) 21.2 (689.7) 689.7 (3) 117.7
(2.3) (2)
(46.3) (6)
145.1 (6)
-------- ------- ----------- -------
Total stockholders' equity 450.9 102.6 78.7 632.2
-------- ----------- -------
Total liabilities and stockholders' equity 2,166.6 1,125.5 393.8 3,685.9
======== ======= =========== =======
The accompanying notes are an integral part of the Unaudited Pro Forma Condensed
Combined Financial Statements.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Fiscal Year Ended February 24, 2007
(dollars in millions, except share and per share amounts)
Historical Acquisition
A&P Pathmark Acquisition Date Pro
Feb. 24, Feb. 3, Pro Forma Forma
2007 2007 (1) Adjustments Note Combined
---------- -------- ----------- ---- -----------
Sales 5,369.2 4,058.0 9,427.2
Cost of merchandise sold (3,702.9) (2,875.2) (6,578.1)
Gross Margin 1,666.3 1,182.8 2,849.1
Store operating, general and
administrative expense (1,693.5) (1,149.4) (65.2) (3) (2,908.1)
Loss (income) from operations (27.2) 33.4 (65.2) (59.0)
(Loss) gain on sale of Canadian
operations (1.3) (1.3)
Interest expense (65.9) (62.3) (23.6) (5) (151.8)
Interest and dividend income 9.0 (8.8) (5) 0.2
Equity in earnings of Metro, Inc. 40.0 (40.0) (6) 0.0
Loss from continuing operations
before income taxes (45.4) (28.9) (137.6) (211.9)
Benefit from income taxes 58.1 10.6 0.0 68.7
Loss (income) from continuing
operations after taxes and
before nonrecurring charges or
credits directly attributable
to the transaction 12.7 (18.3) (137.6) (143.2)
Per share data:
Income (loss) per share:
Basic $0.31 $(0.35) ($2.97)
Diluted $0.30 $(0.35) ($2.97)
Weighted average number of shares outstanding:
Basic 41,430,600 52,107,547 48,211,650
Diluted 41,902,358 52,107,547 48,211,650
(1) 53 Weeks ended February 3, 2007
Unaudited Pro Forma Condensed Combined Statement of Operations
For the 28 Weeks Ended September 8, 2007
(dollars in millions, except share and per share amounts)
Historical Historical Acquisition
A&P Pathmark Acquisition Date Pro
Sept. 8, Aug. 4, Pro Forma Forma
2007 2007(1) Adjustments Note Combined
---------- ---------- ----------- ---- ----------
Sales 2,953.5 1,997.5 4,951.0
Cost of merchandise sold (2,031.9) (1,411.9) (3,443.8)
Gross margin 921.6 585.6 1,507.2
Store operating, general and
administrative expense (920.6) (587.9) (35.1) (3) (1,543.6)
Income (loss) from operation 1.0 (2.3) (35.1) (36.4)
Loss on sale of Canadian
operations (0.3) (0.3)
Gain on sale of shares of Metro, Inc. 78.4 78.4
Interest expense (34.3) (31.8) (12.7) (5) (78.8)
Interest and dividend income 8.3 (5.7) (5) 0.4
(2.2) (6)
Equity in earnings of Metro, Inc. 7.9 (7.9) (6) 0.0
Income (loss) from continuing
operations before income taxes 61.0 (34.1) (63.6) (36.7)
Benefit (provision) from income
taxes (2.5) 6.8 4.3
Income (loss) from continuing
operations after taxes and
before nonrecurring charges or
credits directly attributable to
the transaction 58.5 (27.3) (63.6) (32.4)
Per share data:
Income (loss) per share:
Basic $1.39 $(0.52) ($0.67)
Diluted $1.38 $(0.52) ($0.67)
Weighted average number of shares outstanding:
Basic 41,857,990 52,379,099 48,639,040
Diluted 42,358,715 52,379,099 48,639,040
(1) 26 Weeks ended August 4, 2007
Unaudited Pro Forma Condensed Combined Statement of Operations
For the 28 Weeks Ended September 9, 2006
(dollars in millions, except share and per share amounts)
Historical Historical Acquisition
A&P Pathmark Acquisition Date
Sept. 9, July 29, Pro Forma Pro Forma
2006 2006(1) Adjustments Note Combined
---------- ---------- ----------- --- -----------
Sales 2,890.0 2,001.4 4,891.4
Cost of merchandise sold (1,990.8) (1,427.0) (3,417.8)
Gross Margin 899.2 574.4 1,473.6
Store operating, general and
administrative expense (913.1) (567.0) (35.1) (3) (1,515.2)
(Loss) income from operation (13.9) 7.4 (35.1) (41.6)
Loss on sale of Canadian
operations (0.3) (0.3)
Gain on sale of shares of Metro,
Inc.
Interest expense (34.8) (30.9) (12.7) (5) (78.4)
Interest and dividend income 6.3 (5.7) (5) 0.6
Equity in earnings of Metro, Inc. 19.8 (19.8) (6) 0.0
Loss from continuing operations
before income taxes (22.9) (23.5) (73.3) (119.7)
Benefit from income taxes 14.4 9.3 23.7
Loss from continuing operations
after taxes and before
nonrecurring charges or credits
directly attributable to the
transaction (8.5) (14.2) (73.3) (96.0)
Per share data:
Income (loss) per share:
Basic ($0.21) ($0.27) ($1.99)
Diluted ($0.21) ($0.27) ($1.99)
Weighted average number of shares outstanding:
Basic 41,362,113 52,039,381 48,143,163
Diluted 41,362,113 52,039,381 48,143,163
(1) 26 Weeks ended July 29, 2006
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
(dollars in millions, except share and per share amounts)
Note 1--Basis of Presentation
Acquisition
These unaudited pro forma condensed combined financial statements ("pro
forma financial statements") have been prepared based upon historical financial
statements of A&P and Pathmark, giving effect to the merger and other related
adjustments described in these footnotes. These pro forma financial statements
should be read in conjunction with the historical financial statements of A&P
and Pathmark.
These pro forma financial statements and adjustments are based on
preliminary internal estimates and assumptions made by management and have been
made solely for purposes of developing these pro forma financial statements to
aid in the analysis of the impact of the merger to A&P. These pro forma
financial statements are not necessarily indicative of the results of operations
that would have been achieved had the merger actually taken place on the dates
indicated and do not purport to be indicative of future financial position or
operating results.
The transaction was completed on December 3, 2007 and had been subject
to regulatory approval which was recently received and accordingly access to
information required to prepare the pro forma financial statements was limited
prior to consummation of the merger. The actual results of the transaction
reported by the combined company in periods following the merger may differ from
that reflected in these pro forma financial statements depending on the actual
assets acquired after required regulatory disposals and final fair values
assigned to amortizable assets and liabilities.
The allocation of the purchase price and its impact on the statement of
operations may differ depending on the final fair values assigned to amortizing
assets and liabilities and their related actual remaining useful lives;
including the following categories of intangible assets and liabilities:
o Favorable/unfavorable leases
o Favorable/unfavorable contracts
o Benefit plan obligations
o Pharmacy scripts
o Customer relationships
The allocation of the purchase price to assets which will not be amortized
may also impact classification on the balance sheet depending on the final fair
values assigned; including the following categories of intangible assets:
o Trade name
o Goodwill
The Unaudited Pro Forma Condensed Combined Balance Sheet was prepared
using the unaudited historical consolidated financial statements of A&P and
Pathmark, as of September 8, 2007 and August 4, 2007, respectively. The pro
forma adjustments to the historical balances, except as otherwise noted herein,
give effect to the merger as if it occurred on September 8, 2007.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
52-week fiscal year ended February 24, 2007 was prepared using the audited
historical consolidated statements of operations of A&P and Pathmark for the 52
weeks ended February 24, 2007 and the 53 weeks ended February 3, 2007,
respectively. The Unaudited Pro Forma Condensed Combined Statements of
Operations for the 28-week period ended September 8, 2007 was prepared using the
unaudited historical consolidated statements of operations of A&P and Pathmark
for the 28 weeks ended September 8, 2007 and the 26 weeks ended August 4, 2007,
respectively. The Unaudited Pro Forma Condensed Combined Statement of Operations
for the 28 week period ended September 9, 2006 was prepared using the unaudited
historical Consolidated Statements of Operations of A&P and Pathmark for the 28
weeks ended September 9, 2006 and the 26 weeks ended July 29, 2006,
respectively. The Unaudited Pro Forma Condensed Combined Statement of Operations
for the fiscal year ended February 24, 2007 and for the period ended September
8, 2007 give effect to the acquisition as if the acquisition occurred on the
first day of the period presented (i.e., February 26, 2006 and February 25,
2007, respectively).
Disposition of Assets
Midwest and Greater New Orleans
During the first half of fiscal year 2007, A&P disposed of and
therefore classified its assets in the Midwest and the Greater New Orleans area
as "Assets Held for Sale" on its Form 10-Q Consolidated Balance Sheets pursuant
to the requirements of SFAS 144. SFAS 144 requires that once properties are
identified as held for sale, they are no longer depreciated, valued on an
asset-by-asset basis at the lower of carrying amount or fair value less costs to
sell, and reclassified as a current asset to "Assets held for sale" on our
Consolidated Balance Sheets. As of September 8, 2007, sale transactions for a
majority of the Midwest locations have been completed, with final negotiations
pending on one store location. In addition, in accordance with SFAS 144, the
criteria necessary to classify the operations in both the Greater New Orleans
area and the Midwest as discontinued have been satisfied and such, have been
reclassified in our Consolidated Statements of Operations for the 28 weeks ended
September 8, 2007 and September 9, 2006. The disposition of the stores in the
Greater New Orleans area were completed during the second half of fiscal 2007
and are subject to customary closing conditions. The pro forma balance sheet has
not been adjusted to reflect the impact of the disposition of the final store
location in the Midwest and the stores in the Greater New Orleans area as
proceeds approximated net book value and any adjustments are considered
immaterial.
Federal Trade Commission ("FTC") Dispositions
As a result of review by the FTC, A&P entered into signed asset
disposition agreements which are currently scheduled to close prior to January
10, 2008 and will dispose of six individual store locations (five A&P stores and
one Pathmark store) that are reflected in the historical financial statements
contained in these pro forma financial statements. The combined stores had
Inventory and Property-net book value of approximately $7.0 million and $10.9
million, respectively, as of the date of the pro forma balance sheet. The five
A&P stores had Inventory and Property-net book value of approximately $5.6
million and $7.7 million, respectively, as of the date of the pro forma balance
sheet. The Pathmark store had Inventory and Property-net book value of
approximately $1.4 million and $3.2 million, respectively as of the date of the
pro forma balance sheet. Sales for the combined locations were approximately
$147.6 million, $78.3 million and $76.7 million for the fiscal year 2006 and
twenty-eight weeks ended September 8, 2007 and September 9, 2006, respectively.
Sales for the five A&P locations combined were approximately $109.7 million,
$59.4 million and $58.1 million for the fiscal year 2006 and twenty-eight weeks
ended September 8, 2007 and September 9, 2006, respectively. Sales for the
Pathmark location were approximately $37.9 million, $18.9 million and $18.6
million for the fiscal year 2006 and twenty-six weeks ended August 4, 2007 and
July 29, 2006, respectively. Income (loss) from operations before income taxes
for the combined locations combined was approximately $0.7 million, $0.8 million
and ($0.2) million for the fiscal year 2006 and twenty-eight weeks ended
September 8, 2007 and September 9, 2006, respectively. Income from operations
before income taxes for the five A&P locations combined was approximately $0.9
million, $0.7 million and $0.1 million for the fiscal year 2006 and twenty-eight
weeks ended September 8, 2007 and September 9, 2006, respectively. Income (loss)
from operations before income taxes for the Pathmark location was approximately
($0.2) million, $0.1 million and ($0.3) million for the fiscal year 2006 and
twenty-six weeks ended August 4, 2007 and July 29, 2006, respectively.
Depreciation for the combined locations was approximately $3.1 million, $1.6
million, and $1.6 million for the fiscal year 2006 and twenty-eight weeks ended
September 8, 2007 and September 9, 2006, respectively. Depreciation for all five
A&P locations combined was approximately $2.4 million, $1.2 million, and $1.3
million for the fiscal year 2006 and twenty-eight weeks ended September 8, 2007
and September 9, 2006, respectively. Depreciation for the Pathmark location was
approximately $0.7 million, $0.4 million, and $0.4 million for the fiscal year
2006 and twenty-six weeks ended August 4, 2007 and July 29, 2006, respectively.
For purposes of these pro forma financial statements, A&P has excluded any
adjustments for these dispositions due to immateriality.
Note 2--Purchase Price
The purchase price included in these pro forma financial statements is
preliminary and is based on information that was available to management of A&P
and Pathmark at the time these pro forma financial statements were prepared.
Accordingly, the purchase price will change and the impact of such changes could
be material.
Each share of Pathmark common stock outstanding was converted into
0.12963 shares of A&P common stock (together with cash in lieu of fractional
shares) and $9.00 in cash.
A&P assumed the obligations of Pathmark in the 2000 Warrant Agreement
such that the warrant holders under the 2000 Warrant Agreement shall have the
right to purchase 0.12963 A&P common stock and receive $9.00 per share upon
receipt of the $22.31 exercise price. The value of these warrants calculated
using the Black-Scholes method is $0.20 per warrant.
For Pathmark stock options either (1) granted prior to June 9, 2005
that have exercise prices less than the fair market value of the underlying
stock (where consents are not obtained) or (ii) granted prior to June 9, 2005
that have exercise prices greater than or equal to the fair market value of the
underlying stock, A&P issued 1,107,154 A&P stock options in lieu of cash. The
A&P stock options issued have a fair value in excess of the exchanged Pathmark
stock options of approximately $2.3 million which is recognized as compensation
expense for purposes of these pro forma financial statements in the Accumulated
earnings (deficit) line of the Unaudited Pro Forma Condensed Combined Balance
Sheet. (This charge is not reflected in the Unaudited Pro Forma Condensed
Combined Statement of Operations.) See "--Note 4--Financing" for additional
information.
Each Pathmark restricted common stock unit or restricted share
outstanding was converted into cash equal to $8,255,407. Each Pathmark
outstanding option granted on or after June 9, 2005 and each option granted
prior to June 9, 2005 to the extent consents were obtained was converted into
cash equal to $13,702,115. See "--Note 4-Financing" for additional information.
Additionally, A&P issued roll-over stock warrants to the Yucaipa
Investors under a formula whereby each Pathmark warrant will be converted into
the right to receive 0.46296 A&P warrants (together with cash in lieu of
fractional shares) at an exercise price equal to their existing exercised prices
divided by 0.46296. Settlement of these warrants is subject to the Tengelmann
Stockholder Agreement, which causes these instruments to be accounted for as a
liability that is adjusted to market at each balance sheet date. See "--Note
4--Financing" for additional information.
A&P used a market price of $32.08 for A&P shares, the average quoted
market price of A&P common stock for two trading days before and two trading
days after the merger was announced, when calculating the value of the A&P
common stock that will be issued in this transaction and the value of warrants
under the 2000 Warrant Agreement that will be assumed.
A&P used a quoted closing market price of $12.90 for Pathmark shares
when determining the amount of cash that was paid to buy out Pathmark options,
restricted stock and restricted stock unit holders. This was the quoted closing
market price of Pathmark common stock on November 30, 2007, the last trading day
before the transaction closing date of December 3, 2007. To calculate the value
of issued roll-over options using the Black-Scholes valuation model, A&P used
the average quoted closing price for the two days prior to the closing date and
the closing date of $12.92. Following are Black-Scholes values used for each of
the roll-over stock options that had an exercise price exceeding market price of
the Pathmark common stock as of November 30, 2007, or where consents were not
obtained for pre-June 9, 2005 options:
Black-Scholes
Option Tranche Value per Option
--------------------------- ----------------
10/25/2000 $........3.37
3/29/2001 $........2.85
10/4/2001 $........2.36
9/12/2002 $........6.24
6/13/2003 $........8.47
9/25/2003 $........8.66
6/11/2004 $........9.06
A&P used a market price of $30.05 for A&P shares when calculating the
value of warrants under the Yucaipa Warrant Agreement that was assumed. This was
the quoted closing price of A&P common stock on November 30, 2007, the last
trading day before the transaction closing date of December 3, 2007.
Purchase price paid as:
Equity issued to Pathmark common stockholders $ 217.6
Issuance to Pathmark option holders 8.9
Issuance to Pathmark 2005 warrant holders 177.0
Issuance to Pathmark 2000 warrant holders 1.1
--------------
Total equity consideration 404.6
--------------
Cash paid to redeem Pathmark debt 485.2
Cash paid to Pathmark common stockholders at $9/share 470.8
Cash paid to Pathmark option, restricted stock and restricted stock unit holders 21.9
Cash paid for estimated transaction fees (excluding financing fees) 65.4
--------------
Total cash consideration $1,043.3
--------------
Total consideration $1,447.9
==============
Note 3--Purchase Price Allocation
The purchase price allocation included in these pro forma financial
statements is preliminary and is based on information that was available to
management of A&P at the time these pro forma financial statements were
prepared. Accordingly, the purchase price allocation will change and the impact
of such changes could be material.
Under the purchase method of accounting, the aggregate consideration paid
is allocated to the tangible and identifiable intangible assets acquired and
liabilities assumed on the basis of their fair values on the transaction date.
Because the transaction was under regulatory review, access to the information
required by management to value the assets and liabilities to be acquired was
limited prior to the closing date. Therefore, these pro forma financial
statements presume that the historical value of Pathmark's tangible assets and
liabilities approximates fair value, except as noted herein. The actual values
assigned may change significantly after a valuation is made. The allocation of
the purchase price and its impact on the Statement of Operations may differ
depending on the final fair values assigned to amortizing assets and liabilities
and their related actual remaining useful lives, including the following
categories of intangible assets and liabilities:
o Favorable/unfavorable leases
o Favorable/unfavorable contracts
o Benefit plan obligations
o Pharmacy scripts
o Customer relationships
The allocation of the purchase price to assets which will not be amortized
may also impact classification on the balance sheet depending on the final fair
values assigned, including the following categories of intangible assets:
o Trade name
o Goodwill
Pro forma adjustments are based on A&P management's preliminary internal
estimates of fair values and eliminate the historical Pathmark Stockholders'
equity accounts.
A&P management based the allocation of purchase price to favorable leases
and certain owned property of approximately $686.0 million and $200.7 million,
respectively, on a preliminary valuation performed on properties owned and under
lease by Pathmark as of August 4, 2007. (The net book value of these assets is
approximately $347.8 million, resulting in a net step-up to estimated fair value
of $538.9 million for purposes of these pro forma financial statements).
Management will amortize the favorable leases over the remaining useful life of
the original lease or the remaining useful life of the original lease plus one
renewal option, depending on the probability of renewal at the closing date of
the transaction. Management assumes the average estimated useful life is ten
years and twenty years, respectively, for the favorable leases and owned
property for purposes of calculating annual incremental amortization expense of
approximately $52.6 million, $28.3 million and $28.3 million for the fiscal year
2006 and the twenty-eight weeks ended September 8, 2007 and September 9, 2006,
respectively for these pro forma financial statements. These amounts will change
depending on the actual useful lives of properties purchased, which will be
evaluated upon closing and are not anticipated to be materially different from
the lives used herein.
Pathmark has entered into a leasehold assignment contract for the sale of
its leasehold interests in one of its stores for $87.0 million. The Buyer has
deposited $6.0 million as of December 3, 2007 in escrow as a deposit against the
purchase price of the Lease, which is non-refundable to the Buyer, except as
otherwise expressly provided. Consummation of the proposed transaction is
subject to the satisfaction of certain closing conditions. Accordingly, although
the proposed transaction is expected to close in the fourth quarter of fiscal
2007, neither the consummation of the proposed transaction nor the Company's
receipt of the full proceeds from the sale of the Lease can be assured. The
amounts related to this transaction are excluded from the estimated purchase
price allocation included in these pro forma financial statements.
A&P preliminarily estimates the value of Pharmacy Scripts acquired to be
approximately $63.0 million with an estimated useful life of five years
resulting in incremental estimated amortization expense of $12.6 million, $6.8
million and $6.8 million for the fiscal year 2006 and the second quarter fiscal
2007 and 2006, respectively, for the pro forma financial statements.
Combined incremental depreciation and amortization expense of
approximately $65.2 million, $35.1 million and $35.1 million for the fiscal year
2006 and the twenty-eight weeks ended September 8, 2007 and September 9, 2006,
respectively has been recorded in these pro forma financial statements.
A&P preliminarily estimates the increase in fair value of Inventories to
be approximately $7.5 million.
A&P management expects that a portion of the purchase price may be
allocated to favorable and unfavorable contracts other than leases; however,
management is not able to estimate the value of these contracts at this time.
The value of any such contracts will be amortized over the estimated useful life
of the contracts which will be determined at the time the valuation is made.
Adjustments to reflect the value of benefit plan obligations will be determined
upon the closing of the merger and final valuations; therefore no adjustments
have been made to the pro forma financial statements. A&P management also
believes that a significant amount of the purchase price will be allocated to
Customer Relationships and Trade Name; however, management does not have any
indication of the value of these assets at this time or any other intangible
assets that may be identified during the valuation process and therefore no
adjustments have been made to the pro forma financial statements. The value of
Customer Relationships will be amortized over the estimated useful life of the
assets, which will be determined at the time the valuation is made. A&P intends
to continue use of the Pathmark Trade Name indefinitely and therefore this asset
will not be amortized.
The excess of the purchase price over the fair value of assets (tangible
and intangible) and liabilities acquired will be allocated to Goodwill, which is
not amortized. The amount of Goodwill assumed in these pro forma financial
statements will change depending on the fair values allocated to the tangible
and intangible assets and liabilities acquired.
These preliminary adjustments are subject to the final outcome of
independent analyses that are being conducted. The final valuation and amounts
recorded will be based on (i) the actual net tangible and intangible assets
assumed of Pathmark that exist as of the completion of the merger and (ii)
certain valuations and other studies performed with the assistance of outside
valuation specialists after the completion of the merger and may differ
materially from the information presented in these pro forma financial
statements.
Reconciliation of historical book value of Pathmark net assets acquired
Historical book value of Pathmark net assets as of August 4, 2007 $ 102.6
Less:
Goodwill (144.7)
Deferred Financing Fees (6.6)
--------------
Historical book value of Pathmark net assets acquired (48.7)
Conforming accounting policy for insurance reserves (see Note 7) (16.0)
Step-up in fair value of leased and owned property 538.9
Fair value of Pharmacy Scripts 63.0
Step-up in value of Inventory 7.5
Deferred tax assets 123.4
Deferred tax assets 6.7
Deferred tax liability (252.8)
Goodwill 563.8
Debt to be refinanced
Current portion of long-term debt 39.4
Long-term debt 422.7
--------------
Total allocation of consideration $ 1,447.9
==============
Note 4--Financing
These pro forma financial statements reflect the actual financing of the
acquisition of Pathmark and A&P management's best estimate of the amounts of
financing fees at the time these pro forma financial statements were prepared.
Restricted Cash
A&P entered into a $675.0 million revolving credit facility (the "ABL
facility"), and utilized the ABL facility to collateralize letters of credit
thereby enabling A&P to fund a portion of the acquisition with the previously
restricted cash of $190.0 million at September 8, 2007.
In November 2007, A&P sold its remaining investment in Metro Inc. for
proceeds, net of fees, of $345.1 million and utilized the entire amount of the
proceeds to fund a portion of the acquisition. The investment in Metro is
recorded at market value of $391.4 million on A&P's historical Consolidated
Balance Sheet as of September 8, 2007. These pro forma balance sheet reflects
the disposition of the historical market value with an adjustment to Accumulated
earnings (deficit) of $46.3 million.
Debt
On the closing date, A&P borrowed $200.0 million under the ABL facility to
fund a portion of the acquisition and to pay down the existing A&P credit
facility (approximately $6.8 million at September 8, 2007).
In addition, A&P borrowed $370.0 million under a bridge credit facility
("Bridge facility") from financial institutions to fund a portion of
the acquisition. Proceeds from the Bridge facility and ABL facility were used in
part to pay down the outstanding Pathmark debt (approximately $462.1 million at
August 4, 2007, comprised of current and noncurrent debt of $39.4 million and
$422.7 million, respectively). Of this amount, approximately $352.4 million
relates to the Pathmark senior subordinated notes with a face value of $350.0
million. Approximately $375.5 million was placed in an irrevocable escrow fund
on December 3, 2007 to redeem these notes on the call date of February 1, 2008
at a call price of 102.917%.
A&P anticipates retiring the Bridge facility with alternative financing
within one year; however, there can be no assurance that this will occur. The
Bridge facility initially matures on the first anniversary of the merger closing
date, at which point the loans thereunder will be converted, subject to the
satisfaction of certain conditions such as no default under the Bridge facility
and full payment of fees, into term loans and/or exchange notes that mature on
the eighth anniversary of the merger closing date.
A&P estimates the future maturities of debt on a pro forma basis as
follows:
Less than
Total 1 Yr. 1-3 Yrs. 4-5 Yrs. Thereafter
----- ----- -------- -------- ----------
9.375% Notes, due August 1, 2039 $200.1 0.1 200.0
ABL facility due 2012 200.0 200.0
Bridge facility (assumed 13.0%) (1) 370.0 370.0
9.125% Notes due December 15, 2011 12.9 12.9
Mortgages & Other 1.3 0.0 0.6 0.4 0.3
---- ---- --- ---- ----
784.3 0.1 0.6 213.3 570.3
===== ==== === ===== =====
(1) If the Bridge facility is not repaid in full on or prior to the
maturity date, the principal amount of the Bridge facility may, subject
to certain conditions, be refinanced by a senior secured term loan due
2015. At any time after the Bridge facility is rolled over into senior
secured term loans, the bridge lenders may exchange the principal amount
of the rollover loans for exchange notes due 2015.
A&P issued 11,623,236 roll-over warrants in exchange for Pathmark's 2005
warrants under the Yucaipa Warrant Agreement in the transaction. The number of
warrants to be issued was computed based on the number of Pathmark warrants
outstanding on November 30, 2007 totaling approximately 25,106,350. Settlement
of these warrants is subject to the Tengelmann Stockholder Agreement which
causes these instruments to be accounted for as a liability that is adjusted to
market at each balance sheet date. These warrants are valued using the price of
A&P common stock of $30.05 per common share, the quoted market price of A&P
common stock on November 30, 2007, the last trading day before the transaction
closing date. The warrant liability will be marked to market at each reporting
period. See "--Note 2--Purchase Price" above for additional information.
Equity
A&P issued 6,781,050 shares of A&P common stock to Pathmark common
stockholders in the transaction. For purposes of computing the purchase price,
the price of A&P common stock used is $32.08 per common share, the average
quoted market price of A&P common stock for two trading days before and two
trading days after the merger was announced. See "--Note 2--Purchase Price"
above for additional information.
A&P issued 1,107,154 roll-over stock options in exchange for options
granted prior to June 9, 2005 that have exercise prices greater than or equal to
$12.90, the quoted closing market price of Pathmark common stock on November 30,
2007, the last trading day before the closing date of the merger on December 3,
2007, or where consents were not obtained for options granted prior to June 9,
2005. For purposes of computing the purchase price, the options are valued using
a Black-Scholes valuation model and a market price of $12.92, the average quoted
closing market price of Pathmark common stock for the two days prior to the
closing date and the closing date. See "--Note 2--Purchase Price" above for
additional information.
A&P assumed the 5,294,118 outstanding Pathmark 2000 warrants. Upon
exercise each warrant will entitle the holder receive 0.12963 shares of A&P
common stock and $9.00 in cash. For purposes of computing the purchase price,
the 2000 Warrants are valued using a Black-Scholes valuation model using the
price of A&P common stock of $32.08 per common share, the average quoted market
price of A&P common stock for two trading days before and two trading days after
the merger was announced. See "--Note 2--Purchase Price" above for additional
information.
Source & Use of Funds
- --------------------
Source of Funds
A&P Restricted cash $ 190.0
Bridge facility 370.0
ABL facility 200.0
Net proceeds from sale of Metro 345.1
Issuance of 11.6 million A&P warrants to Pathmark 2005 warrant holders 177.0
Issuance of 5.3 million A&P warrants to Pathmark 2000 warrant holders 1.1
Issuance of 1.1 million A&P stock options to Pathmark option holders 11.2
Issuance of 6.8 million common shares of A&P at $1.00 par value 217.6
----------
Total Source of Funds $ 1,512.0
==========
Use of Funds
Purchase of Pathmark common shares
Cash consideration at $9.00 per share $ 470.8
Equity consideration 217.6 688.4
---------
Purchase of Pathmark Options, Restricted Stock and RSUs 21.9
Exchange of Pathmark warrants
Issuance of 11.6 million A&P warrants to Pathmark 2005 warrant holders 177.0
Issuance of 5.3 million A&P warrant to Pathmark 2000 warrant holders 1.1 178.1
---------
Exchange of Pathmark options
Issuance of 1.1 million A&P stock options to Pathmark option holders 11.2
Pathmark Debt 485.2
Repay borrowings under former A&P Revolving Credit Agreement 6.8
Transaction Costs (including financing fees) 120.4
----------
Total Use of Funds $ 1,512.0
==========
Note 5--Interest Expense and Income
A&P estimates that it will incur approximately $55.0 million in financing
fees and expenses ($30 million for the Bridge facility and $25 million for the
new ABL facility) which will be capitalized in "Other assets." The Bridge
facility has a one-year term; however, after one year, the bridge facility
automatically rolls over into term loans or exchange notes due 2015 subject to
the satisfaction of certain conditions such as no default under the Bridge
facility and full payment of fees. A&P anticipates retiring the Bridge facility
with alternative financing within one year; however, there can be no assurance
that this will occur. If the Bridge facility is retired with alternative
financing, a portion of the $30 million would be amortized over the period the
Bridge facility was outstanding and the remainder would be amortized over the
life of the alternative financing. For purposes of these pro forma financial
statements the Bridge facility financing fees are amortized over eight years.
The ABL facility has a five-year term; therefore, the financing fees associated
with this facility will be amortized over five years.
The Bridge facility bears interest at an initial rate of LIBOR plus 6.50%
per annum, which rate steps up 50 basis points on the earlier of the 30th
day after the merger closing date and the date A&P's Shelf Registration
Statement becomes effective, and thereafter increases an additional 50 basis
points each subsequent month that elapses, subject to an interest rate cap. A&P
has assumed a rate of 11.725% for purposes of these pro forma financial
statements. The ABL facility will bear interest at variable rates, assumed to be
6.6% for purposes of these pro forma financial statements. Using these
assumptions, incremental estimated interest expense including amortization of
deferred financing fees is $23.6 million, $12.7 million and $12.7 million for
the fiscal year 2006 and twenty-eight weeks ended September 8, 2007 and
September 9, 2006, respectively, as calculated below.
Further, these pro forma financial statements reflect a reduction in
interest income of $8.8 million, $5.7 million and $5.7 million for the fiscal
year 2006 and twenty-eight weeks ended September 8, 2007 and September 9, 2006,
respectively, due to the use of restricted cash to fund a portion of the
acquisition and collateralizing letters of credit with the new ABL facility. A
change of 1/8% in the interest rate would result in an annual change in interest
expense and net loss of $0.7 million, $0.4 million and $0.4 million for the
fiscal year 2006 and twenty-eight weeks ended September 8, 2007 and September 9,
2006, respectively.
Annual 2nd Quarter Year
Incremental Interest Expense Adjustment Amount to Date
- --------------------------------------- -------------------- ----------------
Bridge facility $ 43.3 $ 23.3
Less interest expense on Pathmark repaid debt $ (36.6) $ (18.6)
Incremental ABL facility interest $ 7.9 $ 3.2
Incremental letter of credit fee for insurance reserves $ 1.7 $ 0.9
Net incremental deferred financing fees $ 7.3 $ 3.9
Total -------------------- -----------------
$ 23.6 $ 12.7
==================== =================
Note 6--Investment in Metro Inc.
A&P sold approximately 35% of its investment in Metro Inc. on March 13,
2007 for approximately $203.5 million and placed $190.0 million of the proceeds
in a blocked account to fund a portion of the merger consideration. The sale of
these shares resulted in A&P's diminished influence over Metro such that the
accounting treatment for this investment changed from the equity method to an
"available-for-sale" investment pursuant to FAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," and requires an adjustment to the
"Investment in Metro Inc." to the market price at each balance sheet date
through "Additional other comprehensive income."
A&P sold the remainder of its investment in Metro during November 2007 and
utilized the proceeds to fund a portion of the acquisition. The investment in
Metro is recorded at market value on A&P's historical Consolidated Balance Sheet
at September 8, 2007 as $391.4 million. Proceeds, net of fees were $345.1
million, a reduction from market value at September 8, 2007 of $46.3 million,
which was recorded as an adjustment to Accumulated earnings (deficit) for
purposes of these pro forma financial statements. A&P also eliminated $140.3
million of Other Comprehensive Income related to the sold investment as an
adjustment to Accumulated earnings (deficit).
For purposes of the Unaudited Pro Forma Condensed Combined Statement of
Operations, A&P assumed the sale of all shares occurred at the beginning of the
year and has eliminated the equity income from this investment in all periods
presented and removed dividend income of $2.2 million for the twenty-eight weeks
ending September 8, 2007.
Note 7--Conforming Accounting Methods
Based on A&P's preliminary review of Pathmark's significant accounting
policies, A&P estimates recording an additional $16.0 million for self-insurance
reserves to conform Pathmark accounting policies to those of A&P which will be
recorded through the purchase price allocation (see "--Note 3--Purchase Price
Allocation" above). The difference in policy is attributable to A&P including
expected legal fees in the calculation of the expected obligation. A&P does not
expect this adjustment to have a significant impact on annual expense incurred.
This amount could change based upon final valuation of the reserve.
Any additional adjustments are not expected to be significant. Upon
consummation of the merger, further review of Pathmark's accounting policies may
result in required revisions to Pathmark's policies to conform to A&P.
Note 8--Income Tax Effect
As a result of the merger, A&P calculated additional deferred tax
liabilities of approximately $246.1 million ($538.9 million increase in assets
for property and $63.0 million increase in assets for Pharmacy Scripts less $16
million increase in liability for self insurance reserve) multiplied by A&P's
tax rate of 42%. The adjustment of $246.1 million is comprised of $6.7 million
increase in current deferred tax assets and $252.8 million increase in
noncurrent deferred tax liabilities. Prior to the merger, A&P maintained a
valuation allowance of approximately $123.4 million on its net deferred tax
assets including the impact of Metro. The pro forma adjustments include the net
impact of the sale of Metro, additional deferred taxes provided upon acquisition
reduced by the reversal of the valuation allowance, as part of the purchase
price allocation.
Note 9-Cost Synergies and Restructuring
These pro forma financial statements do not include any adjustments for
any cost or other operating synergies that may result from the merger. A&P
expects the transaction to generate significant synergies by the second year
following the closing of the merger. Cost synergy opportunities in cost of goods
and administration are expected to be achieved through increased scale, contract
terminations, and the elimination of the overlap between the two companies.
These pro forma financial statements do not include any adjustments
resulting from integration planning or other nonrecurring charges resulting from
the merger. The substantial majority of nonrecurring charges resulting from the
merger will be comprised of employee termination costs and other exit costs
related to the Pathmark business that are expected to be recognized in the
opening balance sheet in accordance with EITF Issue No. 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination." Other
merger-related charges may be incurred that do not meet the criteria in EITF
Issue No. 95-3, including employee termination and exit costs related to the A&P
business, other integration-related costs, and the impacts of potential
divestitures that are required by governmental authorities. A&P and Pathmark are
collecting information in order to formulate the detailed integration plans to
deliver planned synergies. At this time, however, the status of the integration
plans and the merger-related costs are too uncertain to include in these pro
forma financial statements. A&P, however, estimates costs incurred to
restructure the combined organization to be approximately $115.0 million to be
incurred over the first eighteen months after the closing of the merger. This
amount is comprised of $30.0 million in capital costs mainly relating to
Information System conversions and $85.0 million of costs related to severance,
contract terminations, and other integration related expenses.
Note 10-Unaudited Pro Forma Combined Earnings Per Common Share
Unaudited pro forma combined earnings per common share are computed in
accordance with SFAS No. 128, "Earnings Per Share." Pro forma combined basic
earnings per share of A&P common stock is computed by dividing: (i) pro forma
combined net earnings by (ii) the weighted average number of shares of A&P
common stock outstanding during the period as if the merger had occurred on the
first day of the period presented, which are referred to as the basic shares.
The average number of shares of Pathmark common stock outstanding have
been adjusted to reflect the impact of the merger by applying the exchange
ratios to amounts historically reported by Pathmark.
Weighted average pro forma combined number of common shares:
Q2 Q2
Year to Date Year to Date
Fiscal 2006* Fiscal 2007* Fiscal 2006*
------------ ------------ ------------
A&P weighted average common shares, basic 41,430,600 41,857,990 41,362,113
Pathmark equivalent weighted average number of common
shares outstanding of A&P 6,781,050 6,781,050 6,781,050
--------- --------- ---------
Total combined companies' weighted average number
of common shares outstanding, basic 48,211,650 48,639,040 48,143,163
A&P common stock equivalents 471,758 426,498 510,198
Pathmark equivalent roll-over warrants convertible
to common shares outstanding 1,309,318 2,047,751 1,165,771
--------- --------- ---------
Total combined companies weighted average number
of common shares outstanding, diluted 49,992,726 51,113,289 49,819,132
* Because the Unaudited Pro Forma Condensed Combined Statement of Operations
for fiscal 2006 presents a net loss, diluted earnings per share are
presented as equivalent to basic earnings per share.